I was just trying to identify the potential revenues from the Shrimp Processing business.
My thought process is as below:-
- Identify the peak potential revenues based on capacity.
- Use a realistic capacity utilization to understand realistic revenues.
- Use Thai Unions's shrimp processing business Revenues to understand if the revenues we consider for the JV are reasonable.
Current shrimp processing capacity = 25 T per day
Plans to expand the same to 75 T per day or about 23000 T PA
Last 5 year average realization per T of shrimp processed
Thus, if operated at 100% capacity - this facility can do 23,000 T X INR 679,443 per T or INR 15627 mln.
However, I understand that shrimp processing cannot operate throughout the year. So, conservatively, say it operates at 60% - then the potential revenues would be INR 15,627 mln X 60% = INR 9,376 mln.
(If 60% is too high or too low, I do not know)
Now, from Thai Union's Annual Report for 2015, we get certain indications of it facing issues in sourcing of shrimp. Look at the following comments:
Thai Union 2015 AR
Thai Union might have plans to diversify its sourcing base from within Thailand to from more towards India.
Look at some of the comments in the article above:
“Avanti Feeds is our reliable long term partner in India. I found this relationship very important and has been very fruitful so far. The firm’s strong management team has been consistently delivering great results in recent years, making us a very happy and proud investor of the company. With India becoming an important shrimp processing base for export markets and potentially a major market for seafood in the future, we just cannot miss it. It will hopefully serve as our springboard for even more strategic investments there, should other interesting opportunities arise,” said Thiraphong Chansiri, President
and CEO, Thai Union Group
“We aim to expand our shrimp processing network into India in order to diversify our sourcing and operational risks. Also, added production capacity will help accommodate growing demand for our shrimp products globally. Avanti Frozen Foods’ capacity should compensate our current raw material shortfall in Thailand. India’s shrimp farming sector has not been affected by serious disease outbreaks, such as Early Mortality Syndrome (EMS), like Thailand, China and Vietnam. I am very positive about this new investment. We believe the mutually beneficial partnership with Avanti Feeds will make us a strong player in the promising seafood sector in India,” commented Rittirong Boonmechote, President Global Shrimp Business Unit, Thai Union Group.
"Due to its existing profitable operations and customer base, the firm will be immediately profitable in its first year. Currently, the existing factory has a workforce of 750. The new plant, once completed
and up and running, will add this figure up to 2,250."
The above comments suggest that there some crystallized plan by Thai Union to source shrimp from India.
Now this INR 9,376 mln that we have arrived at - let us understand how big or small is it from the context of Thai Union:-
Thai Union might then use the JV to buy raw shrimp, process it and export it to the parent that might just package it and export further OR may be the JV could export directly from India to US/EU after packaging.
I am just thinking one needs to relate the potential revenues of the JV to the COGS of the shrimp division of Thai Union (it could be with sales of Thai Union as well but let us take COGS conservatively):
Shrimp sales of Thai Union in 2015 (Dec) is 36.2 b Baht which translates to INR 67,047 mln.
Shrimp division COGS (using consolidated COGS/Revenues ratio) would be 30.6 b Baht which translates to INR 56,625 mln.
Thus, the potential revenues of the JV (INR 9,376 mln) translate into a 16.6% of the Total requirement of shrimp by Thai Union.
It seems reasonable that Thai Union would want to shift sourcing base equivalent to 15% of total requirement from Thailand to India.
However, it is interesting that Thai Union is using Avanti for the same and not doing it alone. Because, Thai Union gets only 40% of profits of the JV, we will need to be watchful of transfer pricing going forward.
Also, Avanti gets only 60% of those revenues effectively (from a profitability perspective) which is about INR 5,625 mln. So, could Avanti get an effective sales of INR 5,625 mln at the revenue from - say in Mar'18 when the total shrimp processing capacity of 75T should be fully operational (versus INR 2,861 mln of shrimp sales in FY2016).
Another question I had was on the Feed capacity. In the 2016AR, the Company states the feed capacity will increase by 125,000 and by 40% in the coming year (that is FY2017). Doesn't it imply that current capacity pre-expansion was 312500 T and will go up to 437500 T now? AGain, they said this shall lead to revenue growth of INR 500 crs and profit growth of 5-7% - just wondering whether they were implying a margin drop as profit growth is far lower than revenues.
Let me know if you disagree with the broad thesis above as my understanding would be much lower than many of you on the group. Thanks.