Avanti Feeds’ stock price is down ~ 50%, meanwhile the fundamentals are improving. So, we analyze the company from a long term investment perspective. The company began its operations in 1994 with a 20,000 MT unit in Kovvur.
Industry and Business
Shrimps are cultivated in hot weather and barring China, majorly consumed in colder weather countries. India has a climate that suits the shrimp cultivation well. Also, the 8000 km long coastline provides ample access to the brackish waters required for shrimp cultivation. Rising consumption of shrimps means more cultivation of shrimps. This leads to a growing demand for shrimp feeds.
Indian shrimp exports have grown from Rs 5,700 Crores in FY11 to Rs 30,800 Crores in FY18. The country ranks second in global aquaculture production (China is first) and 80% of the production of shrimps is exported.
In 2012, the EMS epidemic wiped out many shrimp farms in China and this caused the Vannamei shrimp production to drop by 45%. Shrimp farmers in India utilized this opportunity to increase their market share. In 2009, the Government had allowed commercial cultivation of the Vannamei shrimp, which is more resistant to disease than the black tiger shrimp. From 10,000 tonnes in 2010 to 4.5 Lakh tonnes in 2017, the Vannamei shrimp production boomed. This resulted in Vannamei’s production share rose from 2% in FY10 to 76% in FY17.
In 2012, the EMS epidemic wiped out many shrimp farms in China and this caused the Vannamei shrimp production to drop by 45%. Shrimp farmers in India utilized this opportunity to increase their market share. In 2009, the Government had allowed commercial cultivation of the Vannamei shrimp, which is more resistant to disease than the black tiger shrimp. From 10,000 tonnes in 2010 to 4.5 Lakh tonnes in 2017, the Vannamei shrimp production boomed. This resulted in Vannamei’s production share rose from 2% in FY10 to 76% in FY17.
The Indian shrimp feed market grew at ~ 18% p.a. between FY10 and FY17. The growth rate is expected to moderate to 12% p.a. between FY18 and FY23.
The key raw material for shrimp feed manufacturers is Soya. The companies have a very low bargaining power and are not able to pass on raw material price increases with ease.
USA – A major market
In 2014, 31% of India’s shrimps were exported to USA. In 2018, this jumped to 38%. This rise was predominantly because of lower production in Thailand cause by WSS virus. Indian exports to China have picked up pace since 2015 and now constitutes 31% of total exports.
2018 – A challenging year
Imports of Shrimps to USA grew by ~ 7.1% p.a. between 2013 and 2017. However, due to delay in winters and accumulated inventory, the growth rate muted to ~ 4%. As a result, the shrimp feed marker registered a de-growth of ~ 15%.
Financials
Avanti Feeds has two business verticals: Shrimp feed (78%) and Shrimp processing (22%).
Looking at the past data of Avanti Feeds, we see many positives.
- The company has maintained healthy 3 year and 5 year growth numbers
- The company has earned a PAT of ~ Rs 1,339 Crores and generated operating cash flows of Rs 1,035 Crores in the last 10 years
- Avanti Feeds has incurred a CapEx of ~ Rs 343 Crores and paid a dividend of ~ Rs 232 Crores in the last 10 years
- In the last 9 out of 10 years, the company has delivered double digit growth rates
- The company has a very low debt equity ratio of 0.01; the company has current investments of ~ Rs 518 Crores which is nearly 8% of the market capitalization
- The company has delivered a high ROE consistently; in FY19 the ROE tapered off due to low margins and growth
- The company has a very low working capital requirement with debtor days at ~ 5 and inventory days at ~ 40; the working capital to revenue is just 8.1%
Avanti Feeds Stock Price & Valuations
Avanti Feeds Stock trades at:
- PE Ratio (Consolidated TTM): 15
- M.cap to Sales: 1.29
- EV to EBITDA: 8.90
The business is cyclical and there are multiple factors that can cause a slowdown in growth – Tariff war, disease outbreak, fall in shrimp prices, unfavorable Government policies, etc. Under such circumstances, the Avanti Feeds’ stock cannot command valuations that it did in 2017. However, though we do not expect a major expansion in the PE ratio we believe that over the next 3-5 years, the company can deliver a strong growth in earnings. The growth in stock price should be in line with the growth in earnings.
The EBITDA margins should consolidate in the 10% to 12% range and the growth in revenues over the next 3 years should be ~ 15% to 17%.
Investment Opportunity
Avanti Feeds’ stock is on many investor’s radar now. Not only has the stock price corrected by more than 50% but also the recent improvement in shrimp prices globally has supported the financial performance. The company has a ~ 50% market share in shrimp feeds apart from a strong balance sheet and cash flows.
Just because the stock is down ~ 50%, doesn’t mean that it will double to reach the previous high. In fact, most stock prices down by such a whopping percentage won’t reclaim previous highs. So, we have be very careful when picking up beaten down stocks.
Just because the stock is down ~ 50%, doesn’t mean that it will double to reach the previous high. In fact, most stock prices down by such a whopping percentage won’t reclaim previous highs. So, we have be very careful when picking up beaten down stocks.
Avanti Feeds has established itself as a market leader in shrimp feeds. Moreover, the company has a strong balance sheet to support future growth. Investors looking to add for long term can consider the stock (although with their own research). If the stock closes above Rs 500, a new trend will be established on the charts which can propel the stock price further.
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