Updated: Jun 9
Company Name – Avanti Feeds Limited (Avanti)
Current Share Price – INR 550 (Nov 1, 2021)
Market Cap – INR 7,498 cr
1. What is interesting about the stock?
The company’s shrimp feed volumes have grown at an impressive CAGR of 39% since 2009 when it started production of the Pacific white leg shrimp (L.vannamei). It controls 45-50% market share due to its focus on R&D, having started research on L.vannamei in 2003, ahead of the competition. Company’s partnership with Thai Union (amongst the leading processors of seafood in the world) has facilitated implementation of technology to enhance Feed Conversion Ratio (FCR). FCR is a critical feed selection factor for shrimp farmers as it improves their marketable output thereby enhancing their profits. It measures the amount of feed needed to increase the weight of the shrimp by 1gm. As per experts, Avanti’s FCR is 1.2 FCR vs. 1.5 for the industry.
Currently the company has 5 shrimp feed processing units with a per annum production capacity of 6,00,000 MT, focused on India, Bangladesh and Sri Lanka as its markets. Driving next stage of growth, Avanti formed a joint venture with Thai Union in 2015 for frozen shrimp processing and has set up 2 frozen shrimp processing units with production capacity of 22,000 MT per annum. This has enabled the company to enhance its geographical reach with customers for frozen shrimp in USA, Europe, Middle East, Korea, Japan and China.
Key competitive advantages of the Company are:
Joint Ventures with Thai Union – access to latest research and processes improves product quality and hence farmer output. Thai Union has been a global leader in shrimp farming for the past 40 years.
New product segment – Frozen food segment well positioned to leverage Thai Union’s global distribution network.
Farmer network – Avanti sustains its market leadership via quality product and technical assistance provided to over 16,000 farmers.
In 2002 Avanti managed to partner with one of the best in the world to cater to the feed market in South Asia and grew multifold on the back of the partnership. With the feed business having grown to a scale where almost half the market has already been acquired, Avanti is trying to repeat the trick in frozen shrimp through another JV with Thai Union.
But in shrimp feed, it had to compete only with local producers who had a technology handicap. In frozen shrimp, it will have to compete with global players. Is the earlier success replicable?
Thai Union's brand portfolio includes:
• Bellotta (business in Thailand)
• Chicken of the Sea (business in the US)
• Fisho (business in Thailand)
• John West (business in the Netherlands and the UK)
• King Oscar (business in Norway)
• Ayam Brand (business in Indonesia, Malaysia and Singapore)
• Mareblu (business in Italy)
• Marvo (business in Thailand)
• Parmentier (business in France)
• Petit Navire (business in France)
• Rügen Fisch (business in Germany)
• Sealect (business in Thailand)
With 40% interest in the frozen food JV, Thai Union has a strong incentive to leverage the distribution network it has created over decades. Simultaneously, Avanti is well placed to work closely with its network of 16,000 farmers and thereby take advantage of farmer cost arbitrage. Fishing in India is a major industry in coastal states, employing over 25mn people in FY18. India has 8,129km of marine coastline, 3,827 fishing villages and 1,914 traditional fish landing centres. Cheap sourcing plus wide market reach could be a huge competitive advantage against leading seafood processing companies in the world, based in developed countries such as USA, Norway, Japan etc.
2. Key Historical Financials
Flat revenues in FY21 was due to the impact of COVID-19. Shrimp consumption had decreased globally by about 20% to 25% during FY21 due to closure of restaurants, malls and eateries.
In FY19, revenues had stagnated due to no spare feed production capacity.
In TTM, EBITDA margins declined due to soybean prices (input raw material) having risen sharply. Now that the government has given permission to import GMO soymeal, EBITDA margin should climb back to ~11-12%.
RoDTEP scheme being implemented by the government should also protect the industry from duties levied by importing nations on Indian shrimps.
3. What is my view on company valuation?
Avanti is currently trading at EV/EBITDA (TTM) ratio of c. 15x and P/E (TTM) ratio of c. 23x. However, it is important to note that the company is debt free (net cash position of c. INR 1,300 cr) and hence EV/EBITDA is a better indicator.
For a company that has just enhanced capacity and entered into a new business segment and hence will witness revenue growth, and has delivered 16% revenue CAGR over the last 5 years (despite FY21 having 0% growth) with high ROE/ROCE and an incredible 35% CAGR over the last 10 years, an EV/EBITDA of 15x seems fairly attractive.
In FY21, the company utilized 79% of its feed production capacity and 52% of its shrimp processing capacity. In FY20, the corresponding numbers were 81% and 61% respectively. Considering growth in feed capacity will be low as the base is high and the market is limited to South Asia, primary growth will come from the frozen shrimp segment.
The largest shrimp processing company in India is Apex Frozen Foods with 29,000 MT capacity followed by Nekkant Seafoods with 28,000 MT and then Avanti. Apex is currently trading at EV/EBITDA (TTM) ratio of c. 11x but has delivered only 6% revenue CAGR over the last 5 years at lower ROCE. Thai Union trades at EV/EBITDA (TTM) ratio of c. 12x but has almost flat revenues over the past 3 years.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Inability to create a large dent in the global frozen shrimp market.
Susceptibility to outbreak of diseases, unfavorable climatic conditions, and coastal calamities. In August 2021, the company recalled 177 MT of products valued of INR 16 Cr due to CDC, USA linking Salmonella Weltevreden Shrimp outbreak to the recalled shrimps imported from Avanti.
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.