Avanti Feeds Ltd – All things shrimp from feed to processing
Company Name – Avanti Feeds Limited (Avanti)
Current Share Price – INR 386 (Nov 28, 2022)
Market Cap – INR 5,260 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 a ~50% market share due to its focus on R&D, having started research on L.vannamei in 2003, ahead of the competition. The company’s partnership with Thai Union (among the world's leading seafood processors) has facilitated the implementation of technology to enhance the 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. In the 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 a 22,000 MT per annum production capacity. This has enabled the company to enhance its geographical reach with customers for frozen shrimp in the USA, Europe, the Middle East, Korea, Japan, and China.
Key competitive advantages of the Company are:
Joint Ventures with Thai Union – access to the 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 is well positioned to leverage Thai Union’s global distribution network.
Farmer network – Avanti sustains its market leadership via quality products 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 has 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. Frozen shrimp, will have to compete with global players. Is the earlier success replicable?
With a 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 centers. 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 the USA, Norway, Japan, etc.
Company derives 80% of its revenue from the Shrimp Feed business. It is a cyclical business with volatility in both the input raw material price and the final product price to the farmer. The final product price to the farmer depends on the global shrimp prices which in turn depends on the demand-supply situation, freight prices, COVID lockdowns, and geopolitics. So, the Company's pricing power is quite limited, especially in a global recessionary environment.
2. Key Historical Financials
Company revenue grew 23% in FY22 and has grown 8% in Q2FY22 on a YoY basis
However, the EBITDA margins have come down from 11% in FY20/FY21 to ~6-7% in FY22 and H1FY23 due to lower shrimp prices (demand concerns) and higher raw material prices
Management expects the current situation to continue - some of the farmers are looking to go on a crop holiday
Fall in margins has led to lower ROE/ROCE levels in FY22
Higher inventory levels have driven to negative CFO/EBITDA ratio in FY22
3. What is my view on company valuation?
Avanti is currently trading at an EV/EBITDA (TTM) ratio of c. 12x and P/E (TTM) ratio of c. 21x. 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.
Company could be a good investment prospect as it is the market leader and shrimp consumption is expected to increase over time.
Given, the expectation of recession in the US and continuing zero COVID policy in China, the demand situation for shrimp is looking weak in 2023. Investors can evaluate investing in the Company after they see the business turning around.
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 the outbreak of diseases, unfavorable climatic conditions, and coastal calamities. In August 2021, the company recalled 177 MT of products valued at INR 16 Cr due to the CDC, USA linking the 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 an MBA from a premier institute in India.
I have had no new stock, option, or similar derivative position in any of the companies mentioned in the 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.