Returns, which in normal course of understanding should be objective, becomes subjective in stock markets, depending upon starting and ending point of calculation. Hence, when share price of Avanti Feeds fell by almost one third during the last three months, many of our readers and investors became worried. However, if you see the returns for last one year it is still 20 per cent up, easily beating most of the indices. Nonetheless, those who have entered the stock in last four months especially after our review of the stock at Rs 3000 (we had recommended this stock in December 2014 at Rs 1800 with target of Rs 3000 after which we reviewed the stock. After that stock was split in the ratio of 5:1) they must be feeling dejected. Therefore, to provide better guidance to our readers and investors we are again analysing this stock, as many new developments and announcement have taken place since our last review of the stock. We believe that those developments will significantly impact the share price of the company going-forward. Moreover, after interacting with A Indra Kumar, chairman and managing director of Avanti Feeds, we have got more clarity on the business of the company and its prospect going forward.

Avanti Feeds is in the business of aquaculture of seafood and manufacturing of feed. It has two main activities that is manufacturing of shrimp feed and processing & export of shrimps. At the end of FY15, company generated 85 per cent of its total revenue from Shrimp Feed business. This has increased from 76 per cent in FY14.  Processing & export of shrimps constituted the rest 15 per cent of the revenue in FY15, which was 24 per cent year ago.

In a recent development the company has decided to segregate its shrimp processing & export business from its combined activity. When asked to A. Indra Kumar, Chairman & Managing Director, Avanti Feeds, the reason behind such action, he explained that “in order to improve the business efficacy and global recognition of shrimp processing business, company has decided to segregate the shrimp processing business and transfer the same to Avanti Frozen Foods (AFFPL), a wholly owned subsidiary of Avanti Feeds.”

The total exports of shrimp from India in FY15 stood at Rs 24000 crore. If we compare the revenue of Avanti Feeds from processing & export of shrimps it is at Rs 266 crore at the end of FY15, which means company has only 1.1 per cent share in total exports of shrimps from the country. This market share looks paltry when compared to Indian fish and prawn feed market, where the company enjoys huge 39 per cent market share. Moreover, export of shrimp from India is likely to grow between 10-20 per cent annually for next five years and is expected to reach at around Rs 35000-40000 crore by 2020.

Working Capital For Enhanced       Rs 120 crores

CapacitiesTotal:                               Rs 300 crores  

We believe that there is a huge opportunity in this area and hence the management decision of segregating this business and focusing to improve this segment of the business makes perfect sense. However, segregation is not the only solution. And hence when asked to Kumar about what else you are going to do to exploit this opportunity, he admitted and said that “Presently our shrimp export business is not significant as compared to the total exports of shrimp from country. We are in the process of setting up new processing plant with a plan of becoming major exporter”.  The company has planned investment of Rs 300 crore over next one year to increase its capacity in all areas of business. Out of this Rs 300 crore, expansion of shrimp processing plant will take a major chunk of Rs 80 crores. This expansion will be done under its subsidiary AFFPL. This will remain one of the growth drivers of the company going forward. The shrimp export from India is expected to grow at a rate of 10-15 per cent per annum for next few years. In addition to this shrimp processing facility, company is also investing Rs 30 crore in shrimp hatchery. This is like a backward integration with shrimp processing business, wherein company will hatch the seed and will give it to farmers who in turn will grow them and again give it back to company. This will ensure supply of the shrimps to company as well as will help them to maintain the quality of the shrimps, which remain of paramount importance in any market whether domestic or international. The company that is helping Avanti Feeds in its expansion plan is Thai Union, the USD 5-billion Thailand-based frozen seafood company that owns a 25 per cent stake in Avanti.

Once all these investment plan comes on stream, the management expect to achieve its export target of Rs 3500 crore for shrimps by 2020. Back of envelope calculation shows that this will grow at around 90 per cent per annum between FY15 and FY20. When asked to A. Indra Kumar about what will be the contribution from this segment, he said, that this segment will share 60 per cent of the total revenue.

Rest 40 per cent of the revenue will be contributed by Shrimp Feed business, which currently contributes the majority of the revenue. According to the A Indra Kumar, “this segment of the business will grow at a compounded growth rate of 10 per annum and by 2020, it is expected to generate Rs 2500 crore of revenues.” AFL will invest to the tune of Rs 70 core to increase its capacity in this segment.

Summing up the contribution by both the segments, the company is expected to post revenue of Rs 6000 crore by 2020 from current Rs 1776 crore and to achieve its target, company need to grow at a rate of 36 per cent per annum till 2020. The confidence that company will achieve this comes from their constant focus on research & development and historical performance.

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Looking the past performance of the company, it looks possible, however, not an easy task. AFL’s topline in last five year ending FY15 has grown at an eye popping rate of 79 per cent annually. It has grown from Rs 96.16 crore in FY10 to Rs 1776.26 crore in FY15. Definitely it’s the shrimp feed business that has led to such growth. This segment of the business has grown by almost 29 times between FY10 and FY15 and in terms of absolute number it has increased from Rs 52.57 crores at the end of FY10 to Rs 1507 crore for FY15. In the same period its share in overall revenue has increased from 55 per cent to 85 per cent. The Shrimp processing revenue in the same period grew at a CAGR of 45 per cent. Now the next leg of growth will be led by Shrimp processing business. As mentioned earlier this sector presents good potential and moreover company is investing in this area to get maximum out of this.

When we analyse the net profit of the company, the growth is more remarkable, AFL posted a net profit of Rs 116.58 crore for FY15 against a loss of Rs 1.2 crore in FY10. This means that profit has almost doubled every year since FY10. Even in net profit figure, Shrimp Feed business has taken the lead and posted profit growth of 107 per cent annually. Whereas the Shrimp processing business profit has grown at a CAGR of 60 per cent. Going forward we may see acceleration in the profit from this segment.

The shares of AFL are currently (February 02) trading at Rs 417, up by almost 25 per cent from its recent lows of Rs 332. Most of this gain has come on February 1, reacting to the good set of numbers posted by company in its third quarter. One of the reasons why shares of company fell from its high was concern of heavy rainfall in Tamil Nadu and resultant flooding that caused some damage to shrimp culture. The rain also impacted some part of Andhra Pradesh, where the company’s major operation is based out.

Nevertheless, the company operates on cash and carry model. Under this company pays to farmer once he brings the produce. In case of recent floods, it is the farmers who suffered heavy losses due to damaging of standing shrimp culture. The only way company got impacted was slowdown in the shrimp feed sales. On the positive side, the rains have recharged the water bodies and creeks. Fresh water will be available for the new crop in these areas which will start in March-April’16 and because of good quality of water, the crop will be good and hence demand for the feed as well supply of shrimp to the company.

The third quarter result shows the impact of rain, AFL’s topline grew by mere 7 per cent on yearly basis and posted revenue of Rs 413.11 crore for the quarter ended December 2015. Analysing the revenue on segment wise, the shrimp feed revenue has seen a marginal fall of one per cent on yearly basis and recorded revenue of Rs 334.98 crore. The revenue from Shrimp Processing has increased by huge 63 per cent in the same period and recorded income of Rs 77.9 crore for the Q3FY16.

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The company posted overall profit of Rs 36.54 crore for Q3FY16, which is 8 per cent higher than same quarter last year. Despite posting such tepid growth, AFL’s nine-month profit for FY16 has surpassed last year (FY15) profit by almost 10 per cent. Even if we add 10 per cent growth in the AFL’s March quarter number than company is expected to post profit figure of around Rs 150 crore for FY16. Therefore, the company is expected to post earnings per share of Rs 33 for FY16. Hence, shares of company are currently trading at price to earnings ratio of 13.5 times on FY16E earnings. This looks quite attractive given type of growth company is exhibiting. We believe that once company completes its investment plan and revenue starts to kick in, we may see further acceleration in the company’s earnings. Hence we suggest all those readers that have already hold the stock to remain invested and new investors too can enter the stock with investment time horizon of two to three years by that time your investment is likely to double.