Coastal Corporation- fishing for a multibagger
Cmp 304
Market Cap 325 cr
Industry: Shrimp & Sea Food
Initiated on Jan 10, 2022
Detailed note posted on Jan 16, 2022
Company Overview
Coastal Corp (CCL) is among top ten player in Shrimp processing and distribution industry. The company is based out of Visakhapatnam is engaged in processing and exporting of extensive range of shrimp products across the high consuming markets of USA, Europe, Canada, Saudi Arabia, Hong Kong, Korea, Japan & Russia.
- Manufacturing Facilities:
Primarily in Shrimp processing, units are located in the prime aquaculture zone near coastal area of Andhra Pradesh. Strategic location facilitates easy procurement of raw materials and process them immediately after harvest, thereby reduce the products process lifecycle.
Unit 1
CCL in its first unit has 10,000 MT pa, however out of the total capacity 3,500 MT unutilized capacity due to lack of a pre-processing facility.
Unit 2
CCL has embarked on an ambitious capacity expansion in KAKINADA SEZ with a capacity of 10,000 MT. The KAKINADA facility is ready and commercial production has started, after this capex CCL has doubled it’s capacity to 20,000 MT.
It’s interesting to note, KAKINADA facility is fully integrated into processing value added products.
Investment Rationale
- Massive Revival in Sector:
Shrimp Sector Exports is coming back on track post COVID19 pandemic era, with revival in HORECA, Retail & Cruise liner demand. CCL derives 95% of its revenues from USA.
Import data from US shown in chart below is showing highly encouraging trends for Indian shrimp sector. OCT-2021 import volume data has crossed pre COVID19 levels ie OCT-2019.
- CCL embarked on massive capacity expansion:
CCL has recently completed a state of the art processing plant in KAKINADA and commenced commercial operations last month.
The total capex was around 70 cr, out of which 62 cr already incurred, project is eligible for government subsidy of 10 cr, out of which 6.5 cr is already disbursed. The new capacity is fully into value added products, that includes breading, marinated & ready to eat products.
The value added segment has 200-300 bps higher margins vs conventional processing. The KAKINADA expansion takes the capacity to 20,000 MT up from 10,000 MT showing huge revenue visibility in next 2-3 years.
- Strong Pricing trends in US markets:
Overall prices have not only remained firm but also crossed pre COVID19 levels in CY2021. Average shrimp price has crossed 9USD per kg vs 7-7.5USD per kg in pre pandemic era. The average export prices are up 25-30%.
- Easing RM pressure & Farmgate prices:
The Indian shrimp sector saw lot of volatility in feed and RM pricing, however in the last few months the industry is witnessing easing in pricing pressure.
After a sharp fall in soymeal prices in September, prices have stabilized around Rs 55/kg. Given the price hikes shrimp feed companies have taken till Oct’21, shrimp feed companies are expected to see good margins going ahead.
Soya & wheat are key Raw Materials in fish feed, easing in prices has also resulted in lower farmgate prices quoted by farmers.
Latest average farm gate price was in the range of INR 350-380 per kg whereas average realization for exports after processing is in the range of 550-600 per kg.
Below link shows pricing trends in INR.
- Favorable government Policies for the Sector:
Government actions & subsidies has motivated other states also to get into shrimp farming.
More area has come under shrimp farming in AP, ORISSA & GUJARAT. Even land locked states Punjab and Haryana doing fish farming for domestic production.
Some Key Incentives by State & Central Government:
- Central Govt grants upto 10 cr subisdy for setting up green field projects into aquaculture farming.
- Central Govt is providing Interest Equalization @ 5% in respect of exports by the Micro, Small & Medium Enterprises(MSME) sector manufacturers under the Interest Equalization Scheme on Pre and Post Shipment Rupee Export Credit.
- There are various schemes under Andhra Pradesh State Govt; Food Processing Policy 2015-20 for setting up Cold Chain Units for Establishment of Shrimp Processing Units, eligibility upto 50% of Project Cost and Maximum Limit of Grantin-aid upto Rs. 5 Crores and interest Subsidy for 5 years from COD @ 6% (Subject to Max. Rs. 2.50 Crores)
- Orissa government gives land on long term lease, subsidy on power supply. Orissa government charges 1 re per unit of electricity.
- GST Refund, duty drawback @ 2.7% on FOB value and RoDTEP @ 2.5%
Key advantage of sector’s expansion:
Fresh land will have less chances of disease, also barren land which is not fit for any form of agriculture can be utilized for shrimp farming.
Efforts from government agencies has also led to:
Standardized quality of seed
Ample availability of seeds
Less volatility in key RM ingredients
Access to larger land parcel
- New Initiatives & Capacity Expansion:
- Odisha Processing Unit: Consistent efforts from Odisha Govt to promote the sector, CCL has announced new shrimp processing facility at Haridamada, Khordha Odisha which is spread across 4.28 acres.
Estimated capex of around Rs 40 crore, out of which Rs 3.97 crore has already been incurred.
Civil work of the project is expected to start by 1st April 2022 and project is expected to complete by March 2023.
Project is funded by Rs 20 crore of promoters contribution, Rs 15 crore of term loans and capital subsidy of Rs 5 crore. Odisha Govt has granted power @ 1 re per unit.
New facility will leverage the incentives from Odisha State Government under a scheme for establishment of Integrated cold chain and Value added Infrastructure.
Greenfield expansion at Odisha will further widen the value added product basket, its interesting to note the ODISHA plant will be same size as Kakinada facility ie 10,000 MT.
- Ethanol Plant: 1,98,000 KLPD capacity to be set up under 100% subsidiary Coastal Biotech Pvt Ltd for Ethanol manufacturing at Village Maringi in Parlakhemidi Tahsil in Gajapati, Odisha. The capacity to be spread across 30 acres.
Estimated capex of around Rs 150 crore (promoters contribution is Rs 45 crore & term loan is Rs 105 crore), out of which Rs 8 crore has already been incurred.
Ground Breaking Ceremony (Bhoomi Pujan) has been done on 30th November 2021 and Commencement of project is expected by March 2023.
Single window clearance is approved by the state government and the benefit of interest subvention will be provided by Government of India, the actual cost of debt for Coastal Biotech will be in range of 4-4.5% after factoring in Govt Subsidy.
There are lot of synergies & natural advantages for Coastal Biotech in this Ethanol Project. The key ingredients & RM used for Ethanol manufacturing is Soya, Wheat & Corn which is the same ingredient used for shrimp feed & farming.
Another advantage for Coastal Biotech is ample availability of Soya, Wheat & Corn in the proposed plant in Odisha, its also known as the Corn Belt of Odisha.
Financials
The latest revenues & margins don’t justify the potential of CCL accurately. The recent capacity expansion and opening of HORECA sector in US can provide huge opportunities for the company.
At peak capacity CCL can do a revenue of 1,000-1,200 cr by FY25, margins can be in the range of 11-12% thanks to the value added addition in the product portfolio.
We expect a EBIDTA of 100-120 cr & PAT 60-65 cr by FY25, stock is available at 5x FY25 EPS. We assign a valuation of 15x FY25 EPS.
Pls Note: We haven’t factored in ODISHA PROCESSING GREENFIELD PLANT & ETHANOL PLANT revenues in our projections. Its quite realistic to assume CCL can do a PAT of 100-120 cr at its peak with these two capacities come on board.
The debt to equity ratio is on the higher side and can impact the return ratios, but with strong demand in the US and new capacity ready for commercial production.
We expect CCL to generate annual Cash Flows of 50-55 cr, next 3 years of strong cash flows can take care of debt repayment & can fund further expansion plans of the company without taking further leverage on the balance sheet.
Recipe of a Multibagger
- Doubling of Processing Capacity
- Expanded Capacity in Value Added
- Balance Sheet leverage under check (D/E is 0.85)
- HORECA revival in US post COVID19 can provide strong tailwind to the Indian shrimp sector
- ODISHA greenfield expansion in Shrimp processing & Ethanol if executed well can be a big jackpot for CCL
- Revenue potential 3x ie 1000-1200 cr in 3 years and stock available at 300 cr market cap is available at throw away valuation
1. Winner in the making: amongst the top 10 shrimp processing & distribution player in the country. World class manufacturing facility.
2. Export oriented business: Majority of reveneus coming from US.
3. Sector at cross roads: Global markets getting out of strong headwinds post COVID19, seeing revival of HORECA and RETAIL.
4. Capacity expansion: Doubling of capacity just when global market is showing signs of revival.
5. Competitive Edge: India having highest market share in US shrimp sector.
6. Value added products: Company’s expanded capacity is fully into higher margins value added products.
7. Goverment of India support: Strong subsidy and push given by government of India to the sector.
8. Newer Geographies: Goverment’s renewed focus on the sector is opening up newer states to aquaculture. States like Orissa, West Bengal, Gujarat, Punjab and Haryana getting into acquaculture in a big way.
9. Potential: in 3 years, revenues at peak capacity (old and new plant) can increase by 2.5-3x.
Phoenix Capital 