Thank you for the detailed notes. While the long term target of USD 1 bn remains intact, the plan to achieve it is not clear. I personally do not see them achieving it with existing capacities. I believe foray into other segments (like fish feed or value added products into other geographies) may help them achieve the target. While, someone clearly asked the question today on the call, management could not provide a clear answer. Also, it is not clear, what % of their exports are to EU and other countries.I feel these additional markets may provide the company to increase their capacity utilization in processing segment (which they say, will do 11000MT in FY 19). With a capacity of 22000 MT in processing side, I somehow do not understand such low utilization levels. And, have been hearing evaluation of fish feed segment in the last few calls, but no concrete steps to kickstart the process yet. Somehow, I feel the call time of 1 hour is too less (while I registered myself to ask a question, I did not get an opportunity). Most of the time in the call is wasted asking about management guidance on next quarter and there after. Will send across these questions to investor relations team and ask for clarifications. Will keep the forum posted.
22000 MT processing capacity has been recently set up in FY’18. Same was 7500 MT in FY’17.
Not an investor in Avanti but studying the company for last 1-2 months and following here on VP. Most of the people just crib here on a wonderful business.
30% ROE and 5 days receivables even with exports sales!! How many mid size companies can claim that?
People are confused for a good reason. The shrimp processing capacity disclosure is not easy to gather, management keeps harping on the increased capacity figure only, of late. Waterbase has shrimp processing capacity but does not use it in-house, instead farming it out to external parties on contract basis. That might not be a bad idea, since feed has much better margins than shrimp, which is only expected to decline. Also feeds is facing much increased competition now.
Disc: Was invested, pulled out after concall of 2018 Q4.
Sure, and did you try timing the market with SUN? Problem there was, more than enough time, still is…if you have tons of patience and hope, I believe the market has fundamentally changed anyway and exports with limited focus are risky, more so nowadays. True for Avanti also.
Sure, this is a good business, I was invested and will likely invest again, when the price benefit criteria becomes clearer to me, but likely not.
Right now I find there are better opportunities in a down market, where the businesses are doing and are bound to do, much better…
I would have exited much sooner, had I been following VP forum more closely. The data was all there, thanks to VP members , after reading it did not take me one minute to get clarity on this. The February 2018 concall was full of raw-material price concerns, and some of competition and shrimp export issues.
The material pricing (history) and margins were so well discussed here @ VP. This was a classic case of dump and then buy at half the price as the results rolled in
So far my theory has been proven right, for most of the time.
I do not think my re-entry criteria are met yet!
Disc: Was invested, tracking.
I purchased a ton of Avanti, pre-split when the price was down to 1300 Rs. I was surprised that the market can rate a company with tons of cash and 5-yr ROCE of 63% at a PE of 15. Anything short of disease is not cataclysmic and there is no reason to believe that even adjusting for mean reversion makes this price reasonable
If we don’t extrapolate FY’18 profits and consider FY’17, stock is not so undervalued. But that’s besides the point given the health of business and growth potential.
My point here is that people are too much focused on P&L side of things with narrow view on growth and profitability. Whereas real power of business lies in balance sheet.
Zero debt, superb cash generation, almost nil finished goods and stock in process inventory days, 5 days receivables make Avanti a wonderful business.
Of course, growth and profitability are tied to demand-supply dynamics and raw material cost, but that’s ok. Market forces will act and cycle will reverse surely in due course. We saw last year what company is capable of when tide is in favor.
Status: not holding but will start buying soon.
Avanti had 3 superb back to back quarters in Jun 2017, Sep 2017, and Dec 2017, where OPM was 21-22% which was the highest in past 12 quarters. OPM has been in range of 9-14% in the remaining quarters.
With Sep 18 and Dec 18 results yet to come out and comparable quarters last years being very strong, I think one could afford to be patient in buying Avanti. Gradual accumulation over next few weeks and months could be the way to go.
First month of de-growth (-9% YoY) since Feb 2016 is here
Realisation is quite good when comparing recent months but has degrown 6% YoY. Historically, July has peak realisation even though Q3 is where peak revenue is seen which could imply that the pain could continue in terms of degrowth YoY into Q3 as well. Exactly how much, we have to wait and see.
There is an interesting article in this week’s Economist- about record yields of Soya in US and falling prices of Soya.
With good monsoon in India as well, Soya prices may cool down a bit in the coming months.
My two cents: There will not be any right answer to this one. The right price depends on what value you see the business is worth. If there exists a right price that is unanimously agreed in this thread, the information will be acted upon instantly and the resulting stock price would soon move beyond the suggested price (efficient market hypothesis). So, the advantage you would have is to build an independent valuation that you deem fit and act upon without depending on other analysts.
From Apex Q1 FY 2018 Call Conference Transcript
We had mentioned in the last quarter’s conference call that due to a mismatch in the demandsupply,
prices of processed shrimp had started correcting from the beginning of the second half
of the fiscal year FY18 and more so in the last quarter of FY18. However we had also mentioned
that both demand slowdown as well as price correction has been largely arrested and we were
witnessing a gradual pickup in consumption starting from May/ June 2018. We would like to
point out that off late, the export prices have also started to firm up.
Now, on the raw material supply side, the price correction which is typically passed onto the
primary producers, coupled with inclement weather in the past few weeks might have led to a
slowdown in the availability of processed shrimp. However that seems to be a short-lived
phenomenon as the recent pickup in the shrimp export prices along with improving weather
conditions is building a favorable case for shrimp farmers. The farmers are again looking forward
to stock seeds for the next crop of this year. We expect things to normalize and growth to revive
from the second half of FY19 and continue going forward.
Apex Concall Transcript:-
Jul 2018 exports to US from India showed good growth of 14.7% yoy…After all the noise around and with a marginal dip in Jun numbers, was expecting a lower figure for Jul as well compared to 2017…Best part is that while total volumes to US were lower at 55,952 MT in Jul 2018 (Jul 2017- 61,021 MT), Indian exports showed above growth…Every other country export volume has been lower in Jul 2018…
This price is in sync with what Apex food management mentioned in its Q1 call. Prices are definitely improving from Q4… Apex mentioned around 8.5-9 …
Just saw one report from Prabhudas Liladhar…Soyameal production is good this year, sowing area - 6% higher than last year. This will cool down domestic price a bit but not in the rate of 2017 as govt has raised MSP and brought in additional import duty on Soya Oil, to protect farmers.
Avanti Feeds Ltd
Highlights Of Q1 FY18 Results
- Feed Business
o Sales increase by 33.97 Cr to 915.25 Cr compare to 881.28 Cr last year same quarter
o Profit decrease by 99.80 Cr to 117.24 Cr compare to 217.04 Cr last year same quarter. Decrease in profit is because of increase in price of raw material like Fishmeal , Soya , Wheat Flour and Vitamin premixes.
o Company was maintaining high profit margin because of cheap raw material prices in FY18 compare to FY19.
Raw Material Q1 FY19 Price Per Kg Q1 FY18 Average Price Per Kg Q1 FY17 Average Price Per Kg
Fish meal 96.44 77.81 / 84.46 102.10 / 94.30
Soya DOC 38.67 30.60 / 32.35 42.30 / 37.96
Wheat Flour 21.38 20.99 / 21.14 21.23 / 21.58
o After a steep increase in fish meal price during the end of 2017 and in first quarter of 2018 i.e. Jan to March, the price started stabilising and now it is around Rs.80/- to Rs.82/- per KG. The Soyabean price which was Rs.30.60 per KG in June 17 had gone up to Rs.38.70/- in June18 and it is now stabilising at around Rs.36/- to Rs.37/- per KG. Not much decrease took place in soya bean prices due to increase in Minimum Support Price (MSP) by the Government and pick up in export market due to increase in subsidies. In case of Wheat Flour also the prices kept increasing due to MSP.
o As a result profit margins decreased as there was no corresponding increase in the feed price.
- Shrimp Processing and Export Business
o Revenue grew by 9 % to 126.83 Cr compare to 116.40 Cr last year same quarter.
o PBT grew by 54 % to 16.52 Cr compare to 9.42 Cr last year same quarter
- Export prices has been 15-20 % lesser than previous year prices. The farm gate prices of shrimps have also declined steeply by 20-25% during this period, creating apprehensions among the farmers of a further fall in prices, resulting in large scale harvesting of shrimps at a smaller size and also delay in fresh stockings during the first crop of the current year upto July.
- Now the farm gate prices are increasing significantly over the past one month bringing much needed confidence in the farmers to resume shrimp culture again in full swing. The farmers are in the process of resuming shrimp culture in large areas by undertaking stocking during this month and next month. An indicative survey shows that till end of July, 6,737 Mn seeds have been stocked as compared to 8,286 Mn by end of July in 2017. A decrease of about 19% over earlier year which is due to delay in stocking for the reasons mentioned above. In 2016, the stocking was at 6,949 Mn seeds by end of July 16. The present stocking is marginally less than the level as in July 16. However, the stockings are expected to be increased in coming months. A comparison of actual feed sales from Jan- June in 2016, 2017 and 2018(estimate) indicates a total shrimp feed sales in lndia -is about 4,30,000 Mt, 5,75,000 Mt and 5,80,000 •- Mts respectively which means the feed sales in the current 7 months is more or less on the same level as in corresponding period of 2017.
- The total feed sales in India is estimated at 9,50,000 Mts as compared to 10,00,000 Mts in 2017. Though, the stockings are expected to resume now, due to delay in stockings. earlier resulted in reduction of total feed sales. However, your company’s market share is expected to grow up to 47%. These figures are based on Calendar year.
- The export prices have also started showing improvement while the volumes of exports have continued to increase. As of now, there is no dearth of export orders for whatever produced in the country. This development in both production and exports should reinstate the confidence in the long term sustainability of the industry.
Projected Performance of the Company
- Shrimp Feed
o The feed sales during the year FY 19 is expected to remain at more or less same level as in FY 18 due to the reduction in shrimp culture by about 25% to 30%. Company is expected to increase its market share from 43 % to 46-47 % in FY19.
o The prices of major raw materials like Fish meal and Soya DOC were marginally less in FY17 compared to present prevailing prices. For instance, the average fishmeal price in FY17 was about Rs.94.30/- per KG and company is the average price at less than Rs.98/- in FY19. The average Soyabean meal price is expected to be around Rs.39 to 40/- per KG in FY19 as compared to about Rs.38/- in FY17. The average RM cost was Rs.51.84 per KG in FY17 and company expect the average RM cost around Rs.52/- to Rs.53/- per KG. Assuming other costs remaining at the same level as in FY17, which would be company endeavour, the PBT is expected to be around 12%.
- Shrimp Processing and export
o Due to the developments that took place during the first half of 2018, resulting in lower production of shrimps during FY 19 the processing and export of shrimps is now projected at around 11,000 -12,000 Mts, representing a capacity utilisation of above 50 - 55% (total capacity 22,000Mts). Company endeavour is to focus on value added products and achieve a minimum of 50 - 60% export of these products and the balance on other regular products. The export prices and raw material prices are highly dynamic and volatile, the precise pricing of them cannot be estimated at this juncture. However, considering the past trends and composition of future exports, a PBT of 12 -15% appears achievable.
- Earlier company had guided for a high utilization of feed capacity and processing capacity , but now company is guiding it lower , Is it correct ?
- What is the strategy to achieve the target of One Billion revenue by 2022 ?
o The current situation is temporary and the demand will pick up soon and the global shrimp consumption is growing. It is steeply growing, then naturally the feed consumption, the aqua culture also increases, the shrimp production increases. Also company is targeting other geographies also for export . Company will be able to o fully utilize the shrimp feed capacity going forward in next year.
o There are two approaches to achieve the target of 1 Bn USO revenue by 2022.
Supposing in FY20 company will be able to achieve full capacity and if need expansion than company will go for that. Company have provided for infrastructure for the expansion of the value-added products within a short span of time in Processing Unit. In Shrimp Feed company have 6 lakh ton capacity and this will fully utilize and then in a very short time company will able to expand.
Company is looking into other areas like fish feed and also the other pet animals feed. Company is just looking on it and examining it. Company will get into that area once company get convinced about the feasibility of these projects. By this company should be able to achieve the target.
- What will be the Industry scenario from next 2-3 year view ? How company is planning to be placed in US as it is the major consumer for company ? How will be the fish meal costing going forward which will impact margin ? What would be the drivers going forward to achieve the business targets ?
o The reduction in export price of shrimps happened 10 years back company had the similar situation where the price went down and the culture reduced . In the current year, the situation is improving with increase in farm gate prices. There was specific reasons why it happened this year, and company don’t foresee such things next year and it will be the normal year. Whatever company have lost in FY19 will come back in next year. In next two-three years company can increase its total production , exports and company should be able to grow .
o US is a large and stable market for the company . But company is now expanding in new markets. Company is growing into new areas In-fact in last quarter company had increase its Non-US markets. With the Thai Union Support company is strengthening its market share in US itself. Company is expanding in Europe and Non-US countries also.
o In fish meal prices , it is dependent on nature. Fish meal is one of the most important ingredients for the shrimp growth. So, it is necessary to use fish meal for a good protein source for the shrimp. But fish meal prices depend on the sea catches. When sea catches are good, the prices are reasonably within the workable limits, and if there is shortage it reduces, and if catches are very good then the prices reduce, that is what happened in the last year. So, this continues to be a natural product, like any other natural product, this also will be there. Without fish meal it is very difficult to have a natural source of protein for the shrimp. So company cannot avoid the use of fish meal. Company cannot find readily a substitute for fish meal overnight. It takes long time, the research is going on, but it will take time.
- Company had incur revenue of 3400 Cr will it be continue for this year ? How the condition has been change now ?
o Company will cross 3000 Cr revenue.
o Overall export market is higher in the first five, six months was more, actually to the USA. But the prices went down and that was due to the stocks pile up in US because of extended winter in USA. The consumption had come down, so that has now changed. The consumption has picked up and also now imports have started by USA in a large scale, and they have booked orders, this thing, completely the situation has changed now
- What will be the guidance on EBITDA margin for the year ?
o It will be around 13 % and that is delivered by company in Q1 FY19.
- What were the margins made by farmers before the price fall in shrimp and after the price fall in shrimp ?
o It depend upon perception of the farmer . In FY18 The farmer made profit, the feed business made profit, the processor made profit, the ultimate consumer also made profit. So, in the chain, everybody made good profits out of the business. But the situation has slightly changed now in FY18. So, the correction has to take place.
- How much shrimp exports is expected from India in FY18-19 ?
o India export, last year it was 5.6 lakhs MT in FY18, this year it should be 10% to 15% less than previous year. There is a de-growth in volumes.
- The volume growth was 30% and the revenue growth was only 9%. So, what was the reason for drastic drop in realization ?
o The international dropped for company export prices that’s why in spite of volume growth the revenue didn’t grow.
- Is there was no impact of depreciation company saw in the quarter ?
o Company hedge the currencies as soon as the orders are confirmed. Company don’t keep the dollar realization completely open to the volatility of the market, because company is sure that this is the price at which company is quoting and this is the realization, that is the market spot price, and this is the forward premium so that is how company do it.
o Depreciation has started moving in month of June only April and May and most part of June, the rupee was almost stable, there was not much depreciation, it started depreciating from mid of June.
- Why the other expenses were up by 20 % ?
o It is because of M2M loss of foreign currency that has added up to the other expenses. It is just an accounting entry.
- How much Hatchery capacity company is building and what should be the CAPEX for FY18 and FY19 ?
o Hatchery has now started, construction is going on, it will take about 10 months to one year to commence commercial production. In the first phase company is doing about 200 million seed, it depends again, the prices are volatile. CAPEX will be 12 Cr , 6 Cr for the first phase and another 6 Cr for the second phase.
- Does company is seeing any acquisition opportunity in the market because the Industry is stressed ?
o No because it is only one season that company had bad situation, that’s too in the first half that s has happened. Company is expecting that because the farm gate prices are really increasing significantly and definitely there will be large scale stockings hereafter. It is only one crop in the current season is over. This is too early company have to see the sustainability of the companies in the long-term.
- What is the procurement model for the processing business ? Is there any price-risk that company see when company purchase shrimps for processing and exports or the long-term contracts that company have changes in price are factored into those long-term contracts?
o In Process of buying most of purchase are done on the basis of day to day pricinq, fixed generally by all the buyers; the prices are announced and at that price the procurement takes place. As far as the payment terms are concerned; almost next day the payments are released from company side. Almost the third day the farmer gets the payment from company side. That is a very healthy practice company is doing now. But there is no long term contract as far as the purchase is concerned but company have some selected farms where company have tied up and the supplies comes from them to company. It is in a limited way company is doing .
o Company confirm the orders and tell the price to the farmer and confirm the price and farmer supplies . When it comes there are e different counts and the quality of the products it comes, it is weighed, the quality is determined and then company pay them according to the price which farmer have agreed at the time of count.
- Out of 11.9 lakhs potential of land, of that only 1.53 lakhs is currently being used. So out of this 1.53 lakhs hectares of land which is currently being used, it is hovering around the same number for quite a while now, this number have not going up at least in the last two to three years. So What is the company view on it as it will increase the Pie for the Industry as well as for the company being the market leader ?
o National agencies like MPEDA, NFDB, these agencies endeavour is also that India increases, the production also increases, definitely there has been increase, in Orissa, West Bengal, there has been increase in the area and definitely increase is taking place year after year. There should be support from the other governmental agencies also NFDB and MPEDA and these people are discussing with the local governments asking them to provide land to maritime states to provide to the shrimp culture farmers the land and facilities and these things are happening and company hope these efforts will give results in the years to come. Definitely the production will go up, the area will increase.
After going through both Avanti and Apex presentations and Q&A, can one consider “Invest in good companies during bad times” statement especially if one has a long term view and never minding of getting capital stuck or 4-5% down for a couple quarters.
Disc: Invested both Avanti @1500 (before split) and [email protected] and in view of adding more in dips further.
I would not mind if it goes down 4 or 5 percent as well. But would you mind if it goes down another 50% and stays there for a while? I do not know globally how the shrimp cycle works. But like any agricultural stocks, this could as well be in a commodity cycle and we should know whether the cycle is turning before investing with confidence in this stock.
Thanks for your reply. Though 50% down from CMP is very unlikely but I assume you are just trying to put an example in the view of conviction to hold. As I mentioned both the companies AR is intimating progress in the situation compared to first half of the year and also considering shrimp cycle it’s very short and farmers can quickly respond to either of the situations so I assume may be its not a bad idea to bet on these 2 scripts. As a new investor and already having major exposure to these 2 scripts, I decided to stay long whatever may be the situation just to see whether I can stay strong or not.
Please pardon me if can write like this or not, still learning. Thanks