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

Ladies and gentlemen, good day, and welcome to Apex Frozen Foods Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chowdary Karuturi. Thank you, and over to you, sir.

Thank you, Manuja. Good morning, everyone, and thank you for joining us on this investor call for the fourth quarter and FY '24. With us on this call today are Mr. Durga Prasad from our finance team; and Ms. Madhavi from our operations team; along with Stellar IR Advisors, our Investor Relations adviser. We have uploaded the presentation on the website of the Stock exchanges and we hope you had a chance to go through it. Let me begin by going through the numbers for the quarter. The net revenue for Q4 FY '24 came in at INR 162 crores as against INR 148 crores in Q3 of FY of the same fiscal year, but lower than the revenue of INR 212 crores in the Q4 of last fiscal, that is FY '23, mainly due to the subdued demand from our key market, which is U.S.A. and overall lowered global shrimp prices, which have been tapering off in the recent months and continue to remain at subdued levels. On top of that, the preliminary countervailing duties imposed by the U.S.A. on Indian frozen shrimp at 4.36% also acted as an additional dampener. On the positive side, our shrimp sales to the market such as the European Union continue to do well. Sales to the EU posted a growth of 31% year-on-year in FY '24. Consequently, the share of the EU in the overall sales mix increased to 30% in FY '24 from 19% last year, making it more diversified sales mix. It is important to note that this growth is only from our ready-to-cook products as we still await the regulatory approvals from our -- for our high value-added and Ready to Eat in the EU. Our company is optimistic about the future growth prospects of this market and the opportunities it provides, particularly once the Ready to Eat approvals are in place. The total volumes sold by our company stood at 2,302 metric tons in Q4 of FY '24, as against 2,851 metric tons in the Q4 of the last fiscal. However, there is a recovery from the Q3 of FY '24, where the volume stood at 2,117 metric tons. As we await regulatory approvals from the European Union, our high-value Ready to Eat products are only sold in the U.S., which contributed to the decline in overall Ready to Eat sales in Q4 FY '24. While promotional activities are being carried out by retail and the food service companies that are also the distributors for restaurant chains, their impact has been very gradual as we discussed in the previous quarter. From the company's end, like we mentioned last quarter as well, we have been taking steps with regard to setting up our wholly-owned subsidiary in the U.S., mainly for support with regard to logistics and also market development in the U.S. and the rest of North America. The work on this front is progressing and actually pending certain regulatory approvals in India and which we are hoping to see the benefits coming in from FY '25 onwards. On the balance sheet side, gross debt was reduced by INR 60 crores from INR 167 crores as of March 31, 2022, to INR 107 crores as of March 31, 2024. And the total debt to equity remains at a comfortable level of 0.22x. Also, there is a healthy growth in the net cash flow from operations from INR 36 crores in FY '22 to INR 112 crores in FY '24. And with regard to the EU market, as we have mentioned earlier, our sales to EU have picked up very well. And in fact, the market was able to cater to a good amount of sales on volumes. However, we still definitely feel deprived of having the capability to sell our Ready to Eat products to the EU market because which is the regulatory approval pending not just for our company, but all the companies that are awaiting approval that have started operations in 2019. And we are confident that we are able to develop further more into EU markets. And also now we are really looking at exploring the Scandinavian side of the European Union. Going to FY '25, we are exploring newer markets there too, along with a few other markets in Asia, which is mainly to increase the overall sales of company, which have been under pressure due to the slow demand from the U.S. market. And in regards to the supply at the global level, of course, Ecuador shrimp supply continues to add some pressures on the realizations, and we always did have the advantage of shorter sailing periods whereby being closer to the North American market, that definitely have had its impact with regard to our sales volumes as some of our customers have replaced their products -- with their products reduced in Ecuador and especially in the U.S. market mainly. That is all from our side. Thank you very much, and I now open the floor for the questions. Thank you.

[Operator Instructions] The first question is from the line of Ranodeep Sen from MAS Capital.

I wanted to understand, came across an article, which mentions that government is working on formulating another scheme to promote shrimp aquaculture in a big way in the nontraditional fish producing state in North, specifically UP, Haryana, Rajasthan and Punjab. Haryana apparently has already seen 500 hectares of water bodies being not under shrimp farming. Any thoughts around this and this leading to a scenario of oversupply in the backdrop of where we are seeing demand issue?

Thank you. Firstly, I would like to -- we would like to inform you that because of the slow down in the demand, there has also been a little bit of a conservative approach from the farmer side who are already have been doing farming in the past few years, I mean, for many years, and they actually did reduce some areas and also some stocking densities in the past 1 year. So to precisely answer your question, as and when such developments take place in other parts of the country, like you mentioned in the North of India, it necessarily did not create a supply glut in the present period because there is also going to be a little bit of drop in the production from the existing farmers, which we foresee, even going into the current financial year FY '25. So such alternative areas with the support from government would definitely be helping in bringing a balance in the supply. So that way, we don't expect a glut, to answer your question. Whenever such steps are taken by the government and any progress is made, and whatever supply is created with those efforts would definitely support any shortage of supply, which is likely to be there in the current fiscal, especially because of the dampened markets or the reduced prices in the overall market scenario. I hope that answers your question.

Sure. noted. Sir, I wanted to understand, I think a couple of calls back earlier, you had mentioned about the government of Ecuador taking away the diesel subsidy, which could have rationalized their pumping of produce into the global economy. Has that taken place, sir? Or because you also mentioned today, Ecuador continues to lead the supply game. So just wanted to understand where are we from Ecuador perspective?

I mean, it was true at that point. Also, Ecuador has been levied CVD marginally, but that is on a preliminary level, which I think we have also informed in the earlier calls -- sorry, in the last call, which they did, of course, they did rectify it subsequently. But however, there is a preliminary CVD, which has been imposed on them. Also a few days back on the May 23, we have heard -- we have understood from a public announcement that Ecuador is also being levied in anti-dumping -- this is preliminary anti-dumping duty of 10.58%. And also along with Ecuador, again, Indonesia, on a preliminary basis, has been awarded an anti-dumping duty rate of 6.3%. This is a on -- I mean I'm just answering -- we are answering in context with regard to duties being levied on these countries, but that also answers the Ecuador side. So that is the situation with regard to that. They have been levied countervailing duties too, but there have been some changes and we will know with more clarity by around October or November of 2024, when it will be finalized with regard to the countervailing duties, which will be more because of the subsidies, of course. On our front, which we have already announced, I have announced in the beginning of the opening remarks that India has been levied the countervailing duties of 4.36%. Again, which is also preliminary. But however, that is also the rate at which we have been making provisions, as well as cash deposits for any arrivals of shipments arriving into the United States from April 1, 2024, which basically also have been factored in even for those shipments, which have started from India in the month of February and March. So that is the situation on a countervailing duty to answer your subsidy related question. But rather, I think I've also answered on the anti-dumping duty rate, which was just announced 5 days ago.

That was helpful, sir. If I may ask 1 more question. We've been waiting for this RTE facility at you going live more than 3.5 years. Any clarity on this? Like where is it headed? And any timelines have been shared with the government there?

It's been 5 years since we have been waiting. I mean for us in -- because, as I mentioned, it was in 2019 -- around 2019, no approvals have been given in our facility of capability of Ready to Eat was available since 2020, basically FY '21. So it's been almost 5 years. And the main challenge here is the discussions and the talks between government of India and EU Council based in Brussels. The last we heard in September 2023 is that there is some pursual and talks basically going on between government of India and the EU commission regarding this issue of awarding new factories their approval, the respective approvals. Also removing most likely, which we are not yet sure, we are also going to remove, the 4.3% duty, which is there on Indian shrimp across European Union and also removing one of the nontariff barrier, which was there, of testing every Indian shipment 50% -- sorry, 50% of every Indian shipment which is arriving into the EU for antibiotic substances, which actually causes a big challenge for the importers. all these 3 main points are part of those discussions. And they have informed us in September 2023 that these points will be taken care very soon and we think it would be moving more positively probably from next month. I mean, once the new government is in place in the first week -- I mean, sorry, in the month of June. So once the government is in place after these elections are completed, we think things can get more active and all these 3 points, which also includes our companies on approval for Ready to Eat capacity also could be accorded. So we are positive about it in this year. We are very positive about it based on what we receive, the information which we received in September, 2023.

[Operator Instructions] The next question is from the line of Gauri from Old Bridge Asset Management.

Sir, we heard your comments on ADD and CVD across various countries, India, Ecuador, Indonesia. Could you just sum it up for us. I know that these are preliminary duties and subject to change. But just in case, as things stand today, what is really the CVD and ADD preliminary duty for India, similarly for Ecuador and similarly for Indonesia? So this will help us appreciate the competitive positioning that India would have versus the other 2 nations. That's my first question.

Yes. Regarding the anti-dumping duty rate of India, as mentioned in the opening remarks, it's 4.3 -- sorry, I'm sorry. The anti-dumping duty rate is 1.35%, which has been the case for the past 4 years in case of India. For our company, it's 1.35%, anti-dumping duty rate. The preliminary rate for CVD for India is at 4.36%, which also is the rate for our company, 4.36%, which is subject to change around October and November, we'll know. But we have already started paying the deposits cash [indiscernible] CVD for those consignments since -- whichever have been arriving into the U.S. since April 1, 2024. With regard to Indonesia, they do not have a new CVD as per -- I mean, pretty much, they're at 0%, which we were also kind of getting that information from the beginning. And the anti-dumping duty, however, as I have mentioned, that has -- sorry, the anti-dumping duty is 6.30% for the country of Indonesia. And in the case of Ecuador, their CVD -- their anti-dumping duty is 10.58%, as I had mentioned earlier. Do you remember, in the case of Indonesia and Ecuador, both the duties are on a preliminary basis because there could be -- they will be changing, around October or November, they will be finalized which is regarding that, so in the Ecuador, please -- sorry.

You gave us a number of 10.58% as ADD, which is preliminary duty and subject to division, and subject to finalization, okay. And CVD would be?

Yes. In the case of CVD, they have actually initially been announced 7.55%, but that actually got revised after a few days, there was some correction on the Ecuador duty -- CVD, which -- one minute, please. I'll come back to you on that.

No problem. I'll take this offline. Yes. The second was on really, you've got slower growth this year. However, somehow our gross margins have been able to hold. So if you can comment, is there a product mix change that is helping us or a geography mix change that is helping us because while you have a slower top line growth, gross margins, however, are not as bad. And second is on the working capital also, somehow we've been able to contain our interest costs. Yes, if you can comment on the 2.

Yes. And with regard to the gross margins, of course, it's more on the market mix for sure. The EU business growing definitely during the quarter has balanced out to maintain that even though we have had a huge drop with regard to earlier sales in that quarter. And however, as we keep stating in the past also, we believe that gross margins could even further be increasing as and when we have the ability to produce the regulatory products for the European Union market to which, unfortunately, yes, it's a long wait. It has been a long wait for our company, waiting for almost 5 years, as I mentioned in one of the earlier participants. And that -- so that is the stage with regard to -- that's the status with regard to the gross margin's point. And your second question was...

On the working capital area, really, I mean, we've seen some bit of a slippage, but the interest costs, however, have been contained. So is it something to do as on the balance sheet date or if you can really comment?

No. Actually, our -- it is not to do with the balance sheet date alone, but it is -- it will even be coming down even further as, of course, even though compared to last year, our major working capital is on -- with regard to our debtors, which is our receivables and which was, of course, last year, it was 38 days last year. But this year, it has increased by 10 days, but that's mainly because our shipments, with all the Red Sea crisis, which is there, has been taking longer duration because of sailing periods. And so that is 1 reason it has increased marginally, especially during the complete part of the third quarter and mostly the fourth quarter. But however, we also have a significant amount of receivables pending through scripts and duty drawback at -- with the government of India, which we are likely to see those being received in this -- sorry, Q1 FY '25, thereby it would also enable us to reduce our borrowing even further and thereby lowering our overall interest costs, for sure, even going into the current year. And that's what I was trying to answer to you on that point.

The next question is from the line of Balamurali Krishnan from Oman Investment Advisors.

So regarding the CVD, so when we are selling for [indiscernible]

There's background noise at your end.

It's fine now. So regarding the CVD. So if you -- we are selling for a U.S.A. So the CVD will be observed at our end? Or our customer will take a hit of the CVD?

Well, the CVD, of course, the prices marginally did increase. But that has -- they have increased since towards the end of Q4 and also from the beginning of Q1 of FY '25 marginally, but we cannot attribute that increase on the customer side entirely to the CVD -- sorry, the effect of CVD alone, but also we also have had increased freight costs also by a little -- marginally compared to last year because of this Red Sea crises, where the vessels take longer time to reach destination and thereby, the shipping lines are charging a little bit extra compared to what they were charging last year. So overall, there has been some effect on the prices at the sales side, but we wouldn't attribute that entirely to the CVD part. And please understand that our company and many other companies in India -- majority of the companies in India will do exports to U.S.A., do it on DDP basis, which is delivery duty paid. So where the duty is being paid by us. Definitely, as the new duties come into play, even to other countries like Ecuador and Indonesia, which did not have any type of duties until now, we are a bit positive that it is more of a level playing field for all supplying nations of shrimp into the U.S. market and thereby, we do expect that there could be some rise in the pricing going forward with these new duties also coming into play. But that, of course, also depends on the inherent demand in the market like the U.S. market primarily. So these will be having some effect for sure on the pricing. And as I mentioned, whatever pricing increase -- price increase we have had marginally from the U.S. market since the beginning of this current fiscal year, however, we also have had additional costs incurring at our end also. So yes, that should answer your question.

Yes, that's great. And do you see any [indiscernible] adopted in the market in this quarter, I think the CVD is not fully accounted for the last quarter. The scenario...

In the last quarter, CVD was provisioned for all the shipments that have been affected by CVD. Because as I mentioned to one of the earlier participants, that even shipments of February month also had to be made. They had to be brought into the CVD because they were all arriving into April, whatever the shipments of our company basically -- of anybody of that have been arriving into -- from since April 1 have been subject to CVD at 4.36%, Additionally, apart from the 1.35% anti-dumping duty, which we're already paying. Yes.

So 1 more on the anti-dumping duty on Ecuador. So I think you mentioned some deadline, [indiscernible] kind of mentioned that. And again, if it is implemented, then what could be the advantage for the next quarter for how the pricing will be?

Well, I have mentioned earlier regarding the Ecuador's anti-dumping duty rate. That was at 10 point -- sorry. Yes, that was 10.58% was the preliminary anti-dumping duty rate on Ecuador. So obviously, if we consider our situation with both CVD and ADD that is anti-dumping duty combined currently, even on a preliminary basis, we are at 5.71%. While Ecuador, again, that is also on preliminary side, having an anti-dumping duty of 10.58%, that pretty much answers what would be the impact. We could see certain advantages, but at the same time, we also have to see how the market goes by. I think I responded to you itself that it's more of a level playing field for all the producing countries that export to the U.S. market because 2 of the major key -- main supplying nations of Ecuador and Indonesia did not have any sort of -- type of duties until now, but now they are having, along with us. And that the rates, of course, are really there at a much higher rate. So we have to see how that goes by. But definitely, if we are at 5.71% for both the duties combined and if they are at 10% plus, definitely, it would be advantages to us in one way, but we have to see how it goes by. We also have to see how the demand in the U.S. also progresses going forward.

Just a small follow-up on that. But I think U.S. authorities are planning to increase the anti-dumping duty and the Ecuador, so I think that our decision is still pending. When...

No, That decision only, I have -- sorry, I have just informed you. 10.58% is what has been announced on Ecuador preliminarily. We would know what is the final around October or November of 2024, most likely. If there is any update -- any further update after that, we would let you know when it is available.

Sure. And lastly, on the demand side. So you might have seen a lot of cycles. So when we are coming out of this inflation cycle, so how demand will pick up for the shrimp products in the U.S.A. So can I expect an immediate demand or it will take maybe 1 or 2 years at the demand [indiscernible].

Well, we'll find -- it's good that you are positive that we are coming out of the inflation cycle, but we have not seen any such signals as of now or any indications as of now. There is a pressure, for sure, in the U.S. market in general. And definitely, when there is a contraction not only on the inflation part, but also their interest rates, there is some good chunk of reduction in overall gasoline prices reducing, definitely, that would also add -- that will add additional scope for demand to pick up for sure. So we should remain positive definitely. But currently, we haven't yet seen any of such things happening. So we are eagerly waiting because -- so we will keep you updated as we have any better news going forward. But as and when any such pressures of inflationary-related or the overall market scenario, definitely, as the demand picks up, we are looking forward for such a situation. However, on our company side, we will be continuing to push even further than what we did in the past with regard to going after every other market, which is there outside of the United States.

The next call is from the line of Nitin Awasthi from InCred Equities.

Sir, wanted to understand the current rates of RoDTEP, are they up for revision? And what is going on with the scheme? Because if I am correct, the scheme has been extended because of the election till September. So any highlights on what could happen to the scheme. Could it change? Or could it change? Or could it continue or will it continue on a different name?

Currently -- sorry, currently, we have no information that it's going to be discontinued as such. However, with regard to the RoDTEP scheme and the duty drawback scheme, the Indian shrimp industry is evaluating for some certain information and also certain working on these schemes because they're working based on -- as you -- we all know that the duty drawback and RoDTEP scheme is all about were funding or renegotiating those indirect taxes and duties and other levies, which are on our inputs in our industry from actually to exports, like all the way to the processing point. So actually, those workings are available in a better way. I mean, the other was represented by the government. We will -- at least we could easily see even our CVD in the U.S. market to be reducing from 4.36% to much lower. There was some -- in fact, there were some issues. So we expect those workings also to be made available in the coming months and hopefully, we are positive on that. But I'm just answering the other question because we have been awarded 4.36% on the preliminary accounting duty part in the U.S. mainly because some information was kind of not available, but it's been made available hopefully soon. So currently, that RoDTEP scheme and the duty drawback scheme, we haven't seen -- we haven't been pulling for any changes. However, they are taking additional working in regard to this information, we are taking additional workings, which we believe has the situation, I mean, as when all the workings are put together, if we are having a better scope to have an increase, we would likely have it. But currently, we haven't been told of any such reduction or increase as such because I think your question was more about a new reduction or if the scheme was going to be removed all together. But we know all the schemes like RoDTEP or earlier in GoI or DDP, they were all subject to renewal or kind of extend -- being extended for on a yearly basis or by an if you remember, even in the past, that's how it was. So from the beginning, it's been since the past 25 years almost since the duty entitlement passbook scheme has come into existence. However, the nomenclature has changed and also the methodology of working -- of those schemes' working have changed over the years. And now RoDTEP is more of -- more WTO-compliance than what the earlier scheme was. So that is a whole background behind this. And so we haven't received any information as of now about this continuation of such scheme.

Understood, sir. Sir, second question would be on your depreciation expenses, which is booked for the Q4, substantially lower. And also, there's a note on why this is substantially lower. So what will be the normalized depreciation rate on a quarterly basis?

We preferred [indiscernible]. Can you repeat your question, please?

The depreciation charge for Q4 was substantially lower, and it was mentioned because it has been done because there has been some changes or reassessing the life of the fixed assets. So going forward, will be the depreciation hit every quarter roughly?

Essentially, this year, we have taken in life or [indiscernible] from the export engineers. So based on a, what is the quarterly depreciation in the [indiscernible] after considering the -- reviewing the useful life that has been stated. And the quarterly impact on from here on. We are only [indiscernible] for the quarter, on a quarterly basis. On the quarter, INR 1 crore, it can be reduced from next quarter onwards.

Understood. So compared to the previous year, INR 1 crore per quarter, so that would be roughly INR 4 crores on an annual depreciation reduction. Sir, last question from my side. Hatchery sales, how has it been going on comparatively for only your perspective, are you seeing increases? Are you seeing -- what is the farmer appetite right now? And number two, as we had entered this scheme of relationships with the farming community, how is it -- has it helped? And is it meeting your expectations that having your own hatchery is somehow extending the network of farms from which you can procure?

Yes. The first thing on the pricing side, yes, our -- it has marginally increased compared to last year as far as the feed sales are concerned, I mean, between FY '23 and FY '24. However, as I have mentioned to some of the earlier callers, too. There really has been some conservative approach with the farmers in this year. I mean, especially towards the end of FY '24 and the beginning of FY '25. There were recent converter approach because of very stable, low pricing environment, farmers pricing environment in which the farmers are working. They are, of course, working definitely very hard to bring down their costs as we also understand the market scenario and the international dynamics, which are affecting the market, which was kind of much more reassuring in the past 10 years, if you see after -- since 2013 seems pretty much of the -- like historically low number, like almost it's been since 2018. So almost a decade low farm prices were there in the year FY '24. So that definitely has had an effect a little bit on the overall farmer psychic with regard to how many acres of farm you should be doing how many farms should he be managing by himself? Or how much is the stocking densities, which you should be paying? So there has been -- definitely there has been an impact. And they have been going with a reduced approach. So why I'm mentioning this is -- this definitely has an impact on the amount of seed, which they are sourcing or they're buying. But in our case, we have been growing steadily. It's not a significant jump compared to last year. But last year, it was around INR 75 million. In this year, it's been INR 90 million. But it's nothing significant increase. But overall, we do see -- we know that the farmers do have a conservative approach and they're going slowly. Like one of the earlier participants also was mentioning about some improvement -- increase in the overall aquaculture activity even in the Northern part of India. It is a very good news actually in one way because that will eventually balance any shortage of supply or a drop in supply overall in the country in the fourth. But of course, it is definitely another challenge of how that product will be handled, which is produced mostly in Northern India because logistically, there are challenges. But getting back to the topic of the farmers psychic and their thought process and approach. They are being very careful because they are understanding that -- they get a clear understanding that with the way the dynamics in the international markets are, it's CVDs coming in and overall muted Chinese demand. So they are understanding that the prices are not looking -- they are not likely to go up in a significant manner. And they are really in prospecting about their costing their cost metrics and how they can bring them down. In fact, quite a lot of farming sites have been able to get -- been able to -- the farmers were able to reduce their lease costs. Quite a lot of farmers, actually. But there are still some farmers who are still paying high lease costs. But with the way this market is eventually -- lease -- land lease is one of the very key cost, important cost with regard to the farmers or apart from other costs. But so that is one good thing which has happened. So overall, our sales hasn't really picked up significantly, but it is good. And yes, it is positive for us that we are able to continue our growing relationship, not only in new suppliers or farmers, but also growing with our existing farmers. So definitely, it is because our company doesn't have the backup of the major input for a farmer, which is the seed, which our company has never ventured into. So the seed -- sales on the shrimp seed sales definitely is keeping our relationships definitely going very well. However, with regard to the overall drop in demand, we have also curtailed our hatchery operations limited to our main hatcheries located in the South of Andhra Pradesh. So that's why we are also bringing down our costs overall with regard to our hatchery operations, too, so that consolidating all the sales from the major producing site. So it is working in a positive manner but in a gradual manner. So as I mentioned, we have not significantly increased between '23 and FY '24. But we are positive about because it's -- because of the direct relationships which we have with the farmers or our primary producers.

The next question is from the line of Jasdeep from Clockvine Capital.

Sir, just a clarification, the duties on Ecuador were 0 before this current implementation of antidumping duty and CVD on Ecuador?

Yes.

Okay. And the antidumping duty you mentioned is 10.58% and CVD is 7.5%. So altogether, around 18% of duty on Ecuador?

No, no, no, sorry. Actually, we would -- I'm sorry, we don't have that information readily to share with us. The CVD of Ecuador was revised. It was actually reduced quite well. I don't have it primarily with us, but we will definitely provide the answer in the transcript for sure, definitely. Okay. So the CVD rate was high initially. But there -- before they corrected it and they provide a reduced rate for them. However, we don't have it often with us. We will definitely forward it to you when we talk about.