Sharat Industries Ltd Q4 FY2023 Concall Summary

Key Takeaways

• FY23 profit nearly doubled: Net profit rose almost 90% YoY on revenue growth of 34%, driven by an integrated strategy and a year when the farm division stepped up to offset external pressures elsewhere.
• Russia is the new margin story: The company holds a rare export certification and expects Russia to exceed 20% of exports in FY24, with management calling the market more lucrative than the U.S. right now.
• Capacity is the multi-year operating leverage lever: Utilization sits at just 50% across divisions; the plan to reach 90% over four years is the core of management's margin expansion thesis.
• Ecuador's price war is seen as a blip: Management dismissed the threat as unsustainable, arguing India's labor-cost advantage and processing quality will protect market share once the cycle rebalances.
• What to watch next quarter: Whether the Russia export mix actually hits the 20%+ target, the pace of farm integration scaling, and any stabilization in U.S. demand as the macro environment evolves.

The Russia Opportunity

• Rare certification creates a moat: Very few Indian seafood companies hold certification to export to Russia, and management believes this differentiates Sharat in a market where supply from other countries has dwindled due to geopolitical reasons.
• Margin profile is superior: The Russian market is currently more lucrative than the U.S., with Indian exporters commanding a significant premium because alternative supply sources have pulled back.
• Mix shift underway: Management sees more than 20% of overall exports going to Russia in FY24 and is on track toward that target so far, with Russia expected to play a very critical role over the next two to three years.
• Cooked products already flowing: Cooked product shipments have been made to Russia and were fairly lucrative, delivering more than the 4–5% EBITDA uplift initially described.
• U.S. share to dip deliberately: The U.S. share of exports could fall from 75–80% closer toward the 60s in the current financial year as the company steers toward other markets, with Russia a primary beneficiary.

Sharat Reddy: "In fact, we are one of the few entities in this ecosystem that has a certification for Russia, and we see that being a very good opportunity during the course of this financial year."

Capacity Utilization & Margin Thesis

• Utilization is the central profit lever: Average capacity utilization across all divisions sits at about 50%, and management intends to scale it to about 90% over the next four years, which it believes will contribute significantly to profit margins.
• EBITDA margin growth promised: Management believes the company will achieve significant growth in EBITDA margins over the next three to four financial years, driven by increasing capacity utilization, improving product offerings, and reducing farming costs.
• Historical ROE gap acknowledged: Management conceded ROEs have trailed industry leaders historically, attributing the gap to a 5–6 year transition period involving changes in product offerings and addition of auxiliary infrastructure at processing and feed plants.
• Divisional stability as a buffer: Over the last three years, when one division was under duress from uncontrollable factors, another division stepped up; last year a good contribution from the farm division helped keep profitability stable.

Sharat Reddy: "Our current capacity utilization on average across all the division stands at about 50%, and we intend to scale it up to about 90% over the next four years. We feel that this will contribute significantly to a profit margin..."

Competitive Dynamics & Ecuador

• Ecuador's price-slashing called unsustainable: Ecuador primarily catered to China, and when China underwent bans, Ecuador slashed prices significantly and exported to whichever markets were available, a strategy management described as not conducive for the sector and one that is now causing repercussions for Ecuadorian farmers and the supply chain.
• India's structural advantages hold: The U.S. still prefers India for several products due to consistent quality established over years, and Ecuador has not developed retail-ready products from a processing standpoint, with most of their exports going for reprocess.
• Labor-cost edge is durable: Other countries like Ecuador may not be able to replicate India's position in the short term because processing is a highly labor-intensive process and labor is optimally priced in India from a global perspective.
• Customer loyalty to India as a source: Customers are loyal to India as a country, and management does not see too much of a shift away from India, framing the Ecuador disruption as a blip that will rebalance post-COVID.

Sharat Reddy: "What they have done has not been conducive for the sector, and I think a lot of exporters would reflect the same."

Farm Integration & Backward Linkage

• Own-farm contribution target set: Management aims for 25% to 33% own-farm contribution to exports over the next few years, believing this level is needed to effectively absorb future ripples in the supply chain.
• Biotech JV improving yields: A strategic partnership with a Singapore-based biotechnology firm that developed probiotics for aquaculture has been used in pilot projects to improve tonnage and productivity per acre on the farm, with plans to scale rapidly over the next few quarters or years using these insights.
• Satellite farm model planned: The company aims to have a series of satellite farms to increase own-farm contribution to exports, reducing dependence on external sourcing.
• Farm revenue share to dip: As more farm produce is absorbed by the export division, farm and hatchery revenue share may dip to 5% or less, while exports and feed shares are expected to remain broadly the same.

Sharat Reddy: "...we believe that unless we are anywhere between 25% to about 33% own farm contribution to exports, we might not be able to effectively absorb any other ripples that may come in the future."

Demand Environment & End Markets

• Global demand contracted: Over the six months prior to June 2023, global demand contracted due to macroeconomic factors and geopolitical tensions driving energy cost increases, impacting the frozen food sector broadly.
• U.S. market slowing: U.S. demand is expected to be slower than historically, prompting the company to target other markets like Russia and China more aggressively to balance trade.
• China recovery underway: Business to China improved significantly after overcoming COVID issues and the seafood ban, with certain niche products that the company is able to cater to.
• Supply dynamics tightening: Slightly lower supply from India and several other countries globally, while Ecuador is now going through a cycle of slightly lower production and diseases after a tremendous increase in production last year.
• Value-added products as sector direction: Management believes the sector may adopt more value-added products to keep revenues and profitability high, describing this as a natural progression seen from other countries over the last decade.

Product & Capability Upgrades

• Cooking line and U.S. certification added: During FY23, the company added a cooking line to its facilities and gained certifications for cooked products to the U.S., intending to leverage both during the upcoming financial years to offer more ready-to-eat products to customers.
• 4-star BAP accreditation across all divisions: All four divisions are certified by international bodies, enabling the company to cater to better customers who often pay a premium for traceability, with management intending to continue working on end-to-end traceability.
• Renewable energy investment planned: The company intends to invest time and money in the years ahead to reduce energy costs via captive renewable energy consumption, addressing a cost pressure amplified by geopolitical energy price increases.
• Feed division margin tailwind: A significant reduction in key raw material prices in calendar year 2022 versus 2021 contributed to gross margin expansion for the feed division.

Guidance & Commitments

Key Metrics