Waterbase Limited is engaged in aquaculture business. Company is engaged in manufacturing shrimp feed, processing, hatching and exporting shrimps. Company is the only organized player in the shrimp feed and export segment with 7% market share. According to 2016-17 annual report of ?Waterbase Ltd, company has 1,10,000 metric tons of feed producing capacity and processes about 407 metric tons of shrimps. Company has 173 dealers across India and has generated 323 crores of revenue this year.

Company has many shrimp feed products such as bay life, which is a shrimp feed, tiger bay, a prawn feed. All the shrimp feeds are very popular among shrimp grower especially in south India. Other than these, company has tiger craze and prize catch, both of them are frozen prawns processed by the company launched recently and have been receiving positive response as per companys annual report.

Company operates in two business segments, shrimp feed business and shrimp processing and export segment. Companys 92% of revenue comes from shrimp feed business while shrimp processing contributes 7% of the total revenue of the company. In the future company targets growth of 20% by expanding aggressively in ?domestic as well as international market.

Company’s sales have seen healthy growth in the past 5 years, from Rs. 157 crores in 2013 to Rs. 319 crores in 2017, a CAGR growth of 15%. After amalgamation of pinnae feeds, Waterbase production capacity has expanded to 1,10,000 tons per annum. This amalgamation will prove to be very useful for the company expansion in making pan India presence and will also boost revenue of the company.

Company’s net profit has seen healthy growth from Rs. 6 crores in 2013 to Rs. 11.57 crores in 2017, a CAGR growth of 14% per annum. Company had suffered a severe drop in profits in the year 2016 due to abrupt end of farming season due to outbreak of a disease and changes in weather that caused flooding, due to which there was massive loss to shrimp farming. Company faced operation disruption for three months due to this.

Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.

Waterbase has seen decent growth in revenue from operations on a per share basis of about 6% CAGR, from Rs. 61.1 per share in 2013 to Rs. 83.3 per share in 2017. After amalgamation of Pinnae Feeds, going forward in the future, company expects to grow at 20% per annum because they do not have any capacity constraints.

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

Company’s EPS was growing at a healthy rate from 2013 to 2015, at a CAGR of 29.5%, in 2016, company had to face adversities in its business as the shrimp season ended abruptly because of widespread disease caused by flooding in southern part of India. The company faced three months of operational disruption which lead to drastic fall in companys earnings and profitability. Company’s EPS has grown at 5% CAGR for the past 5 years from Rs. 2.33 per share in 2013 to Rs. 3 per share in 2017.

Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.

Waterebase net profit margins have been growing from 2013 to 2015, from 3% to 7% respectively. As mentioned earlier, last years operational disruption lead to decline in profitability because of which the profit margins declined. The company has recovered from its poor phase and is now on the path to recovery, the margins have already expanded from 0.21% in 2016 to 3% in 2017, and will improve further in the future.

ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.

Similar story can be seen here as well. Waterbase ROCE was on rise from 2013 to 2015. While in the ?year 2013, the ROCE of Waterbase was 8%, its ROCE expand to 18% in 2015. In the year of operational disruption, companys ROCE went down to less than 1%. However, company’s ROCE recovered from its lows and as per th financial data of 2017, ROCE of Waterbase was at 8.08%.

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds).

Company had deleverage its balance sheet in 2014-15, the debt to equity ratio of Waterbase was 0.5 in 2013, while in 2014-15 it was 0.1. With operational disruption and setting up of new hatchery which will be operational in 2018, company had to raise debt in order to meet its capital requirements for the new hatchery business. Company’s management believes, their foray into hatchery business will complement their feeds business and will place the company in a better position than competitors.

Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.

Since Waterbase is in its growth phase, it frequently needs capital to expand its business or to meet operational expenses. That is why, company has not been very generous in terms of dividend payments. Waterbase has paid dividends only twice in the past 5 years, once in 2015, when company paid a dividend of Rs. 1.5 per share and second in 2017, where the company paid a dividend of Rs 1 per share.

Waterbase was struggling to expand its capacity, for which company has recently acquired Pinnae Feeds, because of which, company now has production capacity of 1,10,000 tons per annum. This capacity addition will not only help company in achieving better economies of scale and competitive pricing, company will also be able to export its feeds in countries like China, Indonesia, Philippines, Vietnam and many other SouthEast Asian countries.

With added capacity, company is now targeting 20% growth in business for the future.

Company has also launched prawn feed manufacturing which will derisk its business by reducing companys dependence on shrimp feeds.

Company has been in this business for decades and has ample experience of operating the business. The management is experienced enough to handle all the operational challenges related to business and has the ability to overcome them.

Company is one of the early entrants in the sector and is among very few organized players in the sector. With GST in place company has an advantage of being a formal player in an otherwise a highly unorganized sector.

Seafood prices are determined by the freshness and quality of the product, being a feed manufacturer, company has to maintain high quality of its feeds in order to make sure that farmers get the best produce using the feeds manufactured by Waterbase.

Since the company is also in the business of hatching and export of shrimps, maintaining a balance between quality and price is a challenge for the company.

Company has only 7% market share in the sector, and major part of the shrimp feed market is occupied by unorganized players. In order to market in the sector, company has to offer quality products at a competitive price and has to work towards expanding its distribution network in domestic and export market.

There is a rising demand for seafood in domestic market as well as in Europe and US, which presents a great opportunity for the company. Although domestic market is much smaller in size compared to exports market (domestic market is estimated to be 5,500 crores while export market is estimated to be around 25,000 crores), the margin realized from the domestic market are much higher (margins in domestic market are close to 15% to 20% while in export market it is close to 5% to 8%).

Companys foray into hatchery business will provide a new opportunity for company in de-risking the business by reducing the dependence of company on shrimp feeds business as the only source of revenue. The new business will also complement the shrimp feed business.

Natural disasters such as flooding, widespread disease in animals, rise in prices of raw material are some of the major threats to the companys business. Rising aquatic pollution and scarcity of raw material are major threats to the business.

The stock price has seen huge rally in the past one month, driven by positive news of amalgamation of Pinnae feeds which adds capacity to the production of the company. Secondly because of managements target of achieving 20% growth in the future. If we compare the P/E ratio of the company with the industry P/E the stock still looks cheap. While the P/E of the company is 51.49 while the Industry P/E is at 112.5. Looking at other valuation metrics such as Price to Book value, company is trading at almost 10 times the book value which looks expensive at current levels.

The stock is fundamentally strong and has a good future ahead. With rising demand for shrimps in Indian as well as In US and European market, the business has lot of opportunity to expand and achieve better market share. However, it should also be kept in mind that the business of the company is highly dependent on the climatic conditions and is vulnerable to any natural disaster. Considering the above mentioned factors, I expect a small correction in the stock price in the near future. An investor looking to invest in the company can enter at a price of around Rs. 280 per share and hold for long term (about 1 to 3 years)