Better demand will prompt shrimp processors to expand capacities. Debt to be contracted for part-funding such capex and incremental working capital requirements will be comfortably absorbed by the strong balance sheets of the players.
For the record, India, Ecuador, and Vietnam are the top three suppliers of shrimp, while the US, the EU, and China are the top three consumers. India supplies ~70% of its produce to these three regions.
In fiscal 2023, Indian shrimp players got battered on three fronts — first, extreme heat waves reduced produce; second, shortage of containers and higher logistics cost dented exports to the US and EU; and third, exports to China remained muted amid continued lockdowns there.
This has led to Ecuador, one of India’s major competitors, seizing the lead in shrimp exports. Riding on the cost competitiveness afforded by its relative proximity to the US and EU, Ecuador could supply the produce earmarked for China into the two key markets last fiscal, leading to a jump of ~25% in its exports even as India’s exports declined ~9% on-year.
In fiscal 2024, however, a good produce backed by normal weather patterns and steady demand from China, as its economy opens, will drive revenue up for Indian players. Indeed, India’s shrimp exports to China are likely to cross $1.2 billion this fiscal compared with ~$0.8 billion in the last one. With logistics cost normalising, demand from the US and Europe should revive from the lull last season.
Himank Sharma, Director, CRISIL Ratings, said in a statement, “Buyers from the US and Europe prefer shrimps processed in India because of better quality- and disease-control measures. With supply chains getting restored, Indian exporters can replace Ecuadorian suppliers and regain their lost market share. Revival in the Chinese economy will also aid growth in shrimp exports from India. Revenue will grow ~5% in fiscal 2024 on the back of volume growth of 8-10% despite reduction in realisations.”Last fiscal, shrinking volume and increased input costs of shrimp produce to the processors, led to operating margin falling 50-60 basis points. However, depreciation in the rupee shielded profitability to a large extent.
This fiscal, with volumes reaching a lifetime high, input costs will normalise, while realisations taper. However, with the drop in input costs being steeper than that in realisations, the margin may inch up to the erstwhile level of 7.5%.
In anticipation of higher demand, shrimp players are expanding capacities and will add close to 20% of their existing gross block this fiscal. That said, higher revenue and adequate cash accrual will ensure low reliance on debt.
Nagarjun Alaparthi Associate Director, CRISIL Ratings, said in a statement, “The shrimp sector has displayed financial prudence for quite some time now. Hence, despite moderate debt addition over the medium term, credit profiles will remain strong. Total outside liabilities to tangible networth and interest coverage ratios will remain comfortable ~0.5 time as on March 31, 2024, and 8.0 times in fiscal 2024, respectively.”
That said, any adverse fluctuation in currency rates, global economic vulnerabilities, climatic impact on shrimp production or regulatory changes remain key monitorable.
