A better demand for Indian shrimp from China will increase the revenue to ~5% on-year in fiscal 2024. This will be a largely volume driven growth which will allow operating margin to bounce back to ~7.5%, as costs soften. An analysis of 98 shrimp exporters rated by CRISIL Ratings, accounting for two-thirds of the industry revenue, indicates as much.
The growth in 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.
India, which is among the top three suppliers of shrimps along with Ecuador, and Vietnam supplies ~70% of its produce to the top three consumers, the US, the EU, and China.
However, in 2023 so far, the Indian shrimp players were battered on three fronts —reduced produce due to extreme heat, shortage of containers and higher logistics cost denting exports to the US and EU; and muted exports to China amid continued lockdowns there. Due to this, Ecuador-India’s major competitor has been 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.
However, going forward, Indian shrimp exporters in 2024 can expect the situation to look up on the back of a good produce backed by normal weather patterns and steady demand from China, as its economy opens. 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.
“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.”Himank Sharma, Director, CRISIL Ratings
In the last fiscal, the contracting volume and increased input expenses of shrimp produce to the processors, prompted the operating margins to fall by 50-60 basis points. However, depreciation in the rupee shielded profitability to a large extent.
This fiscal, as volumes reached a lifetime high, input costs are likely to 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%.
Anticipating higher demand, shrimp players have already begun expanding their 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.
“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.”Nagarjun Alaparthi Associate Director, CRISIL Ratings
That said, any adverse fluctuation in currency rates, global economic vulnerabilities, climatic impact on shrimp production or regulatory changes remain key monitorable.