Coastal Corp. ~2.5x capacity exp. 4x profits? Downcycle a risk

Stock Opportunities
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Simple thesis

Company has expanded capacity by ~2.5x which based on below calculations should lead tom ~4x PAT from FY22 levels by FY25 (contingent on global demand). Applying 15/20x multiple to this PAT stock can be 3-4x of current market cap. However, there are negatives and risks as well which are highlighted below

Description

Coastal is a shrimp processor and exporter out of India. In FY22 it exported 6,218 MT of shrimps vs India shrimp export volume of 7.5 lac MT giving it an ~8% market share. Coastal had a capacity of 6,500 MT as of FY22 and post recent expansion capacity has increased ~2.5x to 20,000 MT (source: incred research). Debt to equity is at 0.7x

From AR - With shipments to the US, Europe, Canada, China, Hong Kong, and the United Arab Emirates, this Visakhapatnam-based company is one of the largest shrimp exporters from India to the US market. The company provides a variety of shrimps such as raw frozen blocks and in IQF, cooked in frozen blocks and cooked in IQF forms, and cooked in frozen blocks and cooked in IQF forms based on customer specifications

Auditors- . Bramhmayya & Co. These auditors were roped in to audit Satyam post unearthing of scam. Bankers include HDFCB so that’s good.

Related party - company does Rs8cr of sales to its US subsidiary (seacrest foods) on turnover of ~Rs400cr

Positives and quick valuation

Assuming 80% utilization on the expanded capacity of 20k MT Coastal can do volumes of 16k MT by FY25m (doesnt include Odhisha expansion). Their calculated realizations were $8.8/9.5 in FY21/22. Assuming $8.8 realizations in FY25 or Rs703 per kg or Rs703k per tonne this gives revenues of Rs1,125cr vs incred’s estimate of Rs1,300 cr in FY24. EBITDA margins over FY13-21 have averaged 9% (FY22 seems one off). Assuming slightly higher 10% margin in FY25 (can be higher given operating leverage) we get an EBITDA of Rs113cr. Assuming other income of Rs2cr (8% yield on Rs25cr cash); interest cost of Rs13cr (7% cost of debt on Rs172cr of current debt); depreciation of Rs23cr (11% depreciation of Rs200cr of gross block which includes Rs90cr of current gross block plus Rs90cr of current CWIP plus Rs20cr capex for Odisha expansion). This gives a PAT of Rs59cr and applying 15/20x on this PAT (multiples are subjective) we get a market cap of Rs878cr/1171cr which is 3/4x of current market cap of Rs295

Coastal.xlsx (10.3 KB)
cr

Looking at it another way, their asset turn (sales divided by gross block) pre covid that is from FY18-20 averaged ~8x. Post Odisha expansion gross block will be Rs200cr so 8x gives Rs1600cr of sales vs Rs460cr in FY22

Negatives

Q3FY23 and likely Q4FY23 can be bad quarters. Global shrimp prices (if you see chart below) have come off from highs of $15 till June 2022 to $11 in Oct-Dec 2022 likely as Ecuador has increased supply (see incred note). Avanti feeds also reported a 19%/37% fall in revenues and EBIT q/q in Dec 2023 qtr for their shrimp processing division. Fall for Coastal can be higher given capacity expansion

Also given lower shrimp prices and withdrawal of power subsidy by Andhra govt for non aqua zones farmers were planning to go on a crop holiday (Nov 22 article - Shrimp farmers in Andhra Pradesh mull crop holiday as prices fall - The Hindu) which would limit raw shrimp availability for players like Coastal thereby limiting volumes unless they import shrimps for processing but dont know how cost dynamics play out here

Also company is setting up an 198klpd ethanol plant via its 100% sub coastal biotech at a capex of Rs156cr (debt of Rs125cr). On the face of it raises questions as to why would the company take on so much debt and venture into a completely separate line of business. Ethanol capex and associated revenues have not been factored into my numbers above. Incred

Crisil has termed the company has “issuer not cooperating”

CFO to EBITDA cumulatively over last 10 years has been 43%

Would be great if others who have an interest in the name can also share their insights and thoughts on valuation and nos. or any other positives or risks. Also, how can we track industry/shrimp price on real time basis?

Overall they have expanded capacity significantly however industry is going through a very rough patch and hence near term can be very painful.

Incred Research Services Pvt Ltd CTW@IN Coastal Corp Ltd_06Jun22.pdf (346.9 KB)

Incred Research Services Pvt Ltd CTW@IN Coastal Corp. Ltd_27Nov22.pdf (304.7 KB)

Global shrimp price

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Good to read this. The big capacity will provide operating leverage, agreed! But the total capacity in market is huge. I think in my opinion it would take one more year and an event or disease in ecuador for Indian Shrimp industry to hit the ball out of the park. I was initially invested in it post covid at around 180 bucks and sold it in the upswing, would buy it again if it comes down there. It is cyclical.

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Hi Lavanya. Thanks for your comments. When you say total capacity is huge, do you mean Coastal is adding lot of capacity so it will be hard to place this capacity? Because capacity addition of coastal is ~14k MT which is negligible by global shrimp production nos (if you see below article global shrimp production was 5mn MT) and it is just ~2% of India’s shrimp production of FY22 (India shrimp production was 7.5lac tonne in FY22). So from nos doesnt seem like capacity addition is high for coastal?

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Buying shrimp from farmers is a huge issue, the yields/earning are very low in shrimp

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This would already be reflected in the nos like asset turn right? So not an incremental negative

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I think it takes time to utilize capacities, there are lot of headwinds like demand slowdown in US and cheap imports from South America.

Even though they upgraded the capacity but it’s difficult to get it utilized

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Is there any kind of update from the management of this company?

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There is some update on Ethanol plant, which may start operation in Q4.
Usually 200KLPD has a potential to generate a revenue of 400-500 Cr with 15% margins depends on the feed.

I think its time add some more Qty in the coming quarter. This year they may end up at ~13 EPS and 20 PE. Ethanol plant can boost revenues and some rerating also possible as this biz has some stable margins with huge product demand.

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The company has nowhere in the presentation mentioned their export volume and realizations. Any idea where we can check that data?

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Agreed, I feel the ethanol plant is not valued at current price.

disc: recently invested, biased

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I am trying to gather some information on raw material for this ethanol plant. At the project initial stage Management assumed that FCI rice can be used at RM but now scenario is different, they should run with broken/damaged rice or :corn:. This may impact the margins as well till FCI supply resumes.

Management also confirmed in an interview that 400-450Cr revenue they are looking from Ethanol plant and q700cr from the shrimp business as they have started supplies to Japan and South Korea to derisk the USA businesses. Even if I ignore this growth in the shrimp business, ethanol plant can generate 40-50Cr EBITDA & can add ~ 30Cr to the bottom line.

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See if this video helps for more clarity !!

Tracking

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Thesis on why the shrimp sector looks interesting at the moment

Disclosure: Invested in Coastal Corp and Avanti Feeds

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I feel costal corporation results are better than the apex frozen on revenue & margin side also.

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Coastal corp. used to generate ~600cr revenue in 2018 and 2019 with fixed assets of ~45cr. Now, they have fixed assets of 180cr and revenue of ~400cr.

If their capacity is not fully utilized, why are they expanding so aggressively?

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All players in the industry are running at lower capacity utilizations due to low demand of products in US. Capacity utilizations will improve in FY25 due to entry into new geographies but 100% capacity utilizations may take 1 or 2 years.

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Ethanol plant commissioning is dragged to Q1FY25.
The area, where plant is located is belt of maize, RM sourcing may not be the problem and they would have stored enough RM also. This could be the reason to get into the Odisha state also. If this RM case is executed well then we may see good consistent margins from ethanol segment.

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