The Wealth Creator

Avanti Feeds started off as a shrimp feed manufacturing company. It eyed the opportunity early on and ventured into an unorganized sector. Slowly it also realised the growth potential in high margin shrimp processing and started building capabilities for the same. Shrimp feeds contributed 86 per cent of revenue in FY16 while shrimp processing contributed 14 per cent to revenue in FY16.

The company has grown revenues at a CAGR of 57.58 per cent on a standalone basis. This, along with strong growth in net profit, led to rise in the ROE to 48.8 and ROCE to 66.9 in FY16. The company also has a healthy dividend yield of 20 per cent.

Industry overview

As per the government, marine exports were expected to rise by 20 per cent over 2016-17 to $5.6 billion. This will make up for the decline that was experienced in FY16. The US and South East Asia continue to be major importers of Indian seafood and frozen shrimps. This was mainly due to importance given to high grade disease free Indian sea food. Vietnam, which was the highest exporter, was banned by the US due to inhuman conditions in the sea food industry. This also helped exports of sea food from India.

The government, recognizing the unorganized nature of the sector, through MPEDA is supporting shrimp culture through the cluster farming approach. MPEDA also helps in accessing credit, seeds, feeds and other inputs, thereby reducing chances of disease.

With farmer-friendly policies, the states of Andhra and Odisha have opened up opportunities for aquaculture and are bringing more farmers into shrimp production.

Recently, Pramod Madhwaraj, the Minister of State for Fisheries, announced the government’s intention to develop 5000 hectares across Karnataka for aquaculture. He said that the land, which had become unfit for agriculture due to water logging and saline soil conditions, will be developed for aquaculture.

We believe that these tailwinds and government incentives will bode well for Avanti Feeds.

The company, eyeing export opportunity, has earmarked Rs 80 crore for shrimp processing plant to be spent over FY16-17. This expansion into the high margin processing business was undertaken by its subsidiary Avanti Frozen Foods (AFFPL), in association with Thai Union Group, world’s largest canned tuna manufacturer. This association also helped AFFPL to gain knowhow about the export business. The company plans to achieve sales of Rs 3,500 crore in shrimp processing by 2020.

The company’s new shrimp processing plant with ~30 tonnes a day capacity is expected to start from early March this year.

For shrimp feed manufacturing, the company has spent Rs 70 crore and the facility is operational. This facility will be able to manufacture feed worth 125,000 tonnes and can lead to additional revenue of Rs 540 crore at full capacity. The production for the same has started in August 2016.

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Q3 FY17 financial performance

The company is looking at strategically increasing its share of exports in the revenue. We see that with renewed focus on exports and creation of subsidiary AFFPL, exports as a percentage of revenue increased from 13 per cent in FY16 to 16-17 per cent over the last nine months. The company eventually expects exports to contribute 60 per cent to the revenues.

The company decided to segregate AFFPL as a separate business unit as the nature of business demanded a different focus and operational dynamics. This decision has helped the company to boost its exports.

Also, we see that December is a seasonally weak quarter with 60-65 per cent sales accruing during March to October. However, we see that Avanti Feeds has still been able to grow it sales by 35 per cent YoY in Q3FY17 to Rs 558.6 crore driven by domestic sales, which was up 37 per cent YoY in Q3FY17. The impact of demonetisation was also less acute as most of the cash-based transactions are through cheques and other modes.

The company’s 80 per cent of feed sales are in cash and hence receivables cycle is also low. In FY16, the receivable days touched as low as 4 days, which ensures the working capital requirement is met.

The company is impacted by vagaries of prices of soya meal and wheat. The prices of soya meal reigned high from March to August 2016. We see that the soya meal prices fell thereafter and this shows in the cost of raw material which has fallen by 34 per cent QoQ in Q3FY17. The cost of raw material constitutes 81 per cent of the operating expenses. We believe the company will benefit from lower soya meal prices on the back of normal monsoon. Due to this, the company was able to reign in the operating expenses, leading to fall in operating expenses by 25.2 per cent on QoQ basis. However, we see that D&A has increased by 21 per cent as the company has completed capacity expansion of its facility in August.

Overall, the company achieved a stellar performance in its operating profit, with operating profit growing by 23 per cent YoY and 22 per cent QoQ in Q3FY16. The operating margin has grown by leaps and bounds, expanding by ~420 bps QoQ.

The company’s net profit touched Rs 46.5 crore, primarily driven by high revenue growth and lower raw material prices. This led the company to achieve net profit growth of 25 per cent YoY and 15.6 per cent QoQ. The net profit margin also expanded by whopping 270 bps on QoQ basis to 8.3 per cent. This will help the company to maintain its margins in the range of 7–8 per cent for this fiscal.

Valuation

The Avanti Feeds is trading at Rs 562, which is 27 per cent higher from the recent low of Rs 441. The company with TTM EPS of Rs 35.17 is trading with TTM P/E of 18.35x and P/B of 5.39x, which is attractive as compared to its peers. The company also exhibits financial strength through strong balance sheet. The reserves of the company grew to Rs 501 crore in September 2016 as against Rs 375 crore in March 2016. Its total assets rose to Rs 626 crore in September 2016 as compared to Rs 390 crore in March 2016 which gives ROA of 23.65 per cent which is healthy in the industry.

The company has a healthy balance sheet. The company has only Rs. 9 crore as equity capital and has free reserves worth Rs 446 crore as of September 2016. There is good expectation of issue of first bonus shares in the FY201 7–18.

In general discussion with Indra Kumar, the CMD of the company, regarding growth of the company, he confidently stated that by 2019-2020 the company’s turnover would be 1 billion dollars. i.e. around Rs 6,500 crore. Out of this, Rs 3,500 crore would be from export sales of processed shrimp.

For nine months ended 31 Dec. 2016, the company’s net profit was Rs 129 crore. The net profit for the fourth quarter is expected at Rs 51 crore, and the total expected net profit for the financial year is Rs 180 crore, as against Rs 157 crore for the year ended March 2016, which projects a moderate growth. However, for FY2017-18, CMD Indra Kumar stated that revenue growth would be 25 per cent and net profit growth would be as in the past years.

The company will be adding 30 tonnes per day through capacity expansion. The new plant would be commissioned by March this year. We expect company to grow at the rate of 25 per cent in FY18 on account of higher value added products through capacity expansion. Also, we see the company benefitting from government initiatives and rise in volumes in the near future.