This is my first post on analysis conducted recently.... happy to have ur feedback/ criticism.
Avanti feed: june 8th, mcap of 2,182 cr
I am a recent investor in Avanti with holdings less than 100k inr
This is my first post, so I might have missed a few rules (if any). DISCO, let me know my fault.
Please highlight if any errors, i will be willing to amend them
Any feedback (good/ bad/ ugly) on below, is always welcome
Shrimp is a globally traded commodity (and an actual one, with almost no product differentiation/ branding) and so the prices of shrimp, like other commodities fluctuate hugely; a factor of demand, production in different countries (and disease impact thereon), foreign exchange rates. Prices of shrimps, like other soft commodities will remain volatile and so I wont spend time chasing an unchasable ghost. Although, it has increased substantially over last few years (not counting year on year volatility).
On the volume front, imports in key countries (EU, US and Japan) has largely remained static at 1.6 mm tonnes1, however on the supply front there has been a huge shift and with beneficiary being India. Frozen shrimp exports from India increased from 189KT in FY12 to 357KT in FY15 and down c10% in latest FY. Production from key countries like Thailand was impacted by shrimp diseases (c.50% down from its peak of 600KT), from which India remained insulated, until last year. Another reason for the increased quantities was shift from black tiger (Penaues monodon) to Vannamei; which has higher density.
The dream run we had in shrimp production witnessed a bump in FY16 with India’s shrimps exports down 10% yoy due to lower production on account of shrimp. And the outlook in terms of industry growth now doesnot look very promising. We had a peak production of c.357KT in FY15 and it is unlikely we will see this volume doubling up in next 4-5 years; partly due to the fact that adoption of vannamei that yielded volume benefits is now largely over and growth would depend on new pond being brought under cultivation and at the same time warding off spread of diseases. The link below available on google of Rabobank presentation very well captures the volume dynamics of global shrimp industry.
Feed industry: Feed industry in India is dominated by two key players, Charoen Pokphand a Thai player with 41% market share and Avanti being a close second. Over the years, Avanti has gained market share, registering volume growth above industry rates. With Avanti already close to being a dominant player and further growth rate would be tied to the fortunes/ volume growth of industry.
Feed conversion ratio for shrimps is c.1.7 (obviously dependent on a lot of factors).
Feed cost and composition: as per the raw material consumption provided in Avanti’s annual report; feed composition seems to be pretty static, comprising 32% wheat, 22.0% fishmeal, 39% soya and c.10% others. To note, prices of each of the component is again dependent on market pricing, and in terms of value, soya and fishmeal form c.80% of the RM cost.
From the below, seems like, the Company’s feed sales price is dependent on the raw material costs, which forms c.75% of sales value and is predominantly comprised of soya and fish meal costs. Avanti has been able to increase its per unit profitability and that has also seen an increase in EBIT margins from 9% in FY12 to 11% in FY16.
The Company’s feed business forms around 85% of its revenue and profitability. The feed business has been the focus of the company in past, growing more than 10x in past five years. As discussed above, the margins of the business has gradually and consistently improved over the last few years, increasing from 3.3% in FY11 to 11.2% in FY16. The increase possibly comes from the benefits of scale along with increased channel efficiency and should possibly help it sustain these levels, although the huge growth from here remains questionable.
Segment (lakhs) Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Sales 20,773 39,340 64,803 1,13,159 1,77,625 2,01,828
Feed 13,307 27,148 50,184 85,710 1,50,746 1,73,009
Shrimps 7,293 11,976 14,379 27,209 26,691 28,605
Others 173 216 240 240 188 214
EBIT 575 4,132 4,603 10,498 17,256 21,905
Feed 444 2,537 2,575 7,219 15,058 19,441
Shrimps 40 1,489 1,897 3,153 2,107 2,352
Others 91 106 131 126 91 112
EBIT 575 4132 4603 10498 17256 21905
EBIT Margins 2.8% 10.5% 7.1% 9.3% 9.7% 10.9%
Feed 3.3% 9.3% 5.1% 8.4% 10.0% 11.2%
Shrimps 0.5% 12.4% 13.2% 11.6% 7.9% 8.2%
Sales Composition 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Feed 64.1% 69.0% 77.4% 75.7% 84.9% 85.7%
Shrimps 35.1% 30.4% 22.2% 24.0% 15.0% 14.2%
Others 0.8% 0.5% 0.4% 0.2% 0.1% 0.1%
EBIT composition 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Feed 77.2% 61.4% 55.9% 68.8% 87.3% 88.8%
Shrimps 7.0% 36.0% 41.2% 30.0% 12.2% 10.7%
Others 15.8% 2.6% 2.8% 1.2% 0.5% 0.5%
Shrimp processing: Avanti’s shrimp business basically comprises buying grown shrimps and process (removing head/tails) and then exporting frozen shrimps (c.66% weight yield). These are usually low value products and Avanti I believe would now be focusing on value added processed shrimps. It is targeting c.40% revenue from shrimp exports over next three years2.
The business which had been a better margin business in past, reported lower profitability and part of the reason explained by the company was stringent US regulations, which resulted in increased costs and diversion to other markets.
Avanti transferred the existing processing business into a new subsidiary, in which Thai Union has recently bought 40% stake.
The Company is increasing its processing capacity from current 25tonnes/day to 75 tonnes/ day, which would result in revenue increasing by three times to close to 900 crores. If it maintains its margins of c.9%, we will see c.30% increase over next two year coming from this business alone, although equity return would be diluted by 40% stake sale. Thai union is amongst the leaders in processed sea food and with technology transfer, Avanti should be able to transition from frozen shrimps to value added shrimps and which should aid margin growth. Good things aside, it gets c.7% to 8% of its shrimp exports value as some kind of export incentive, which in FY16 was 23.54 cr, a tad more than its EBIT of 23.52 cr. The company’s margins have been impacted over last two years and thus making this divisions profitability more and more reliant on this export incentive. Can somebody explain me what this benefit is and how long its going to last????
Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Frozen shrimp KT 189.000 226.00 302.00 357 321
% Growth indian shrimp exports 22% 20% 34% 18% -10%
Avanti feed volume growth rate 125% 72% 46% 56%
Frozen Shrimp (Cr) 4,242 6,321 9,608 19,175 24,000
Shrimp Production Growth 20% 34% 18% -10%
Capacity Feed 42,000
Shrimp Feed 27,033 59,230 1,05,422 1,45,930 2,33,489
Fish 10,098 3,589 402 -
Shrimp Feed (Tonnes) 26,642 59,837 1,02,988 1,49,891 2,33,489
Fish (Tonnes) 10,067 3,646 405 -
Shrimp Feed (Lakhs) 11,681 26,368 49,992 85,611 1,50,654 1,73,009
Fish Feed (Lakhs) 1,611 590 65 - -
Feed Value (Rs/KG) 43.21 44.52 47.42 58.67 64.52
Feed RM Cost (RS/KG) 38.63 30.51 38.48 42.45 48.95
Feed EBIT (Rs/KG) 1.2 4.0 2.5 4.8 6.4
Shrimp Production (Tonnes, T) 1,450 1,966 2,713 3,289 3,409
Shrimp sales value (Lakhs, L) 6,444 10,817 13,525 25,338 24,935 26,351
Shrimp export incentive 813 1,160 853 1,870 1,756 2,254
13% 11% 6% 7% 7% 9%
No debt comes at a cost and that is inside the growing SG&A figure which in FY15 was at 102 cr. Of this 102 cr, 72 cr was cash discount or 4.1% of sales. Assuming a 90 day credit cycle, that’s a cost of 16.4% per annum. That’s huge. And also this number seems to be growing gradually. 3.3% in FY13, 3.4% in FY14 and 4.1% in FY15. Seems like the company is fighting share battle with comptetors offering extended credit in supply chain. Call me old school, but I prefer a ballooning number here than on the balance sheet.
Financial analysis of income statement:
The Company which has grown at above 50% yoy till FY15 slowed down in FY16 to just 12.3% and this trend seems to be here to stay. This company has grown above industry but now it’s very close to market leader at c.38%. Significant growth of +50% kind or even 30% kind from here seems unlikely. 30% would mean this company gaining c.8% market share from here; in oligopoly market, CP would fight fiercely for this one. The avenue for growth seems to be the shrimp processing division, where the silver light is moving towards value added shrimp; but the profitability of this division is under pressure; and dependent on the export incentive (remember??). Avanti is tripling its capacity, which means 858 cr in revenue (assuming flat shrimp prices); a growth of just c.30% over FY15 total sales. The segment is a bit small to make a dent in overall scheme of things. Also, 40% of this growth and profits would accrue to Thai Union. Avanti, the company is now more reliant on its old horse, feed business.
I have discussed the past trends for rest and there is nothing much there. Manufacturing expense has gradually come down possibly thanks to increasing scale and efficiency, also evident in electricity consumed per unit shrimp and feed over past few years.
This year 23cr was also contributed by other income (up from 9) and comprises usually bunch of gains (fx, asset sale, investments). Growing at a good rate, but that’s not why I am betting on this company. Amazingly this gains forms 37% (and that is after taking tax) of your FY16 yoy incremental EPS (up from 13% of contribution in FY15). Looks like we will see this again in FY17 with 40% stake sale closing, resulting in gain of c.90 cr (125-86.4*40%), but what after Diwali dhamaka??
Well I am bad with valuation and I find it funny given all the ifs and butts. But nonetheless, I have tried to go with a generous growth figures to see what is the max possible from here.
From revenue growth perspective, next few years seems like a consolidation phase. Assuming a liberal 20% feed revenue growth for next two years and another 15% in 2019 and 2020, and tripling of shimp processing every two years (75tpd by 2018 and 225tpd by 2020), you would be around tripling the revenue to c.5900 cr in 2020 (flat prices). If I take segmental EBIT and assume constant margins for feed and +1% margin expansion for processed shrimp to a max of 10.2%, we reach EBIT of 633 crores, c.3x jump from FY16. Remember the fun part, 42% of this is now coming from shrimp business, of which 40% is with Thai Union. If I remove, Thai’s stake, EBIT would increase to only 528 crores, a jump to 2.4FY16 figure.
Now there are a lot of dependencies in above; I agree hands down, but even with the liberal in my heart, seems like the dream run is over. And the good times in Indian industry remains dependent on a lot of factor including the shrimp disease gods. If you are an atheist, check with a Thai shrimp farmer, he will tell you what can happen when gods go angry.