The article’s headline screams ‘disease’ but I could not find any details in the writeup?
I listened to Avanti concall today and it seems management is very confident of maintaining topline at previous year’s levels.
The main risks to margins remain the volatility in raw material prices namely fishmeal, soya and wheat flour prices which have gone up significantly in first six months of calender year 2018 and now seem to be stabilising/cooling off. Of these, soya prices might not come down too much as it is protected somewhat by MSP announced by govt. There is high cultivation of soyabean and a rich harvest can curtail excessive rise in prices. Wheat flour prices I think will remain steady/go slightly down. Fishmeal prices is where some amount of relief can be there. This depends largely on the kind of fish caught. It remains a rich source of protein and till an alternative comes up is likely to remain important in the raw material mix.
The other variable remains the farmgate prices of shrimp. If the farmers can make more money due to higher farmgate prices, the company can raise feed prices to some extent. But it seems from management commentary that in the larger interest of the business equilibrium, it cannot get away with raising prices in accordance with higher raw material prices.
This comes across as a business with limited pricing power and hence a volumes and market share gains game.
Disease outbreak remains a sword hanging over the whole business. It can come about any time. Vietnam it seems is facing this issue now.
With so many variables affecting the business and poor pricing power, we need to make our minds what kind of valuations we can pay for this kind of business.
Management hinted at maintaining topline same as previous year. If just for the sake of calculations if one were to go by management commentary and project earnings (this can be way off the market because of changes that can happen in farmgate prices and change in raw material prices) on a topline of say 3400 crores management has guided for 12% margins. Operating profit could be around 400 crores. Other income of 50 crores takes the total to 450 crores. On this based on q1 depreciation of 9 crores, we can put in depreciation of 40 crores. So PBT comes to 410 crores. Company pays full taxes (as per last 2 years ) so tax comes to 135 crores. So we arrive at a net profit figure of 275 crores. Based on a current market cap of 5600 crores the price earning multiple comes to around 20 times FY 19 projections.
I would love to buy it at 10 PE but it seems thats wishful thinking since company is a market leader and still gaining market share. So at around 15 PE maybe it is worth a definite entry and accumulation. This level is around 3700 crores market cap which warrants a 30% correction from current levels.
The other view can be that these are cyclically depressed earnings and happens once every few years and things tend to improve after a brief lull. That changes most calculations and perceptions and levels to buy. If one considers these assumptions then current levels also offers a good entry point.
This is a company and sector where most positives and negatives are bunched up together. In fy 18, which was a bumper year, the farmgate prices were high, demand was good, raw material prices were abnormally low and company had a bumper year. Picture now seems exactly opposite with higher raw material prices, lower farmgate prices etc. The recent spurt in farmgate prices needs to be seen in terms of sustainability. i.e how long can these spurts sustain.
Technically till now there has been a series of lower tops and lower bottoms. None of the price rallies has managed to take out previous tops. Most rallies have finished closer to 50% retracement to previous fall or lower. Going forward the recent lows of 388-390 remain extremely crucial to watch.
disc: no position but under watchlist.
Thanks for sharing the insights Hitesh. The only point I would beg to differ is pricing power. Below is the view of OP margin & NP margin over the years for Avanti. The rising margins is a strong proxy of the pricing power the company has. The company’s move to not increase the prices in current times is simply to support their customers (farmers) pass through current tough times.
I think you raise a broader point regarding the cyclicity of the shrimp industry.
I believe Hitesh’s post was to stress how farm gate prices determine pricing power (or lack of) in the feed business, i.e. raw material prices cannot be passed on if not supported by farm gate prices.
The chart you shared shows consistent margin growth over a 9-10 year period.
So how is the shrimp business cyclical ? On the demand side, shrimp is consumed around the year in the US and China. On the supply side, shrimp has a short gestation period compared to cyclical agri products and farmers can quickly respond to demand.
Does AVANTI being vertically integrated from hatcheries, feeds to processing (hatch to table) reduce cyclicity and introduce pricing power unique to the industry?
Just thinking out aloud.
Hitesh Said about the disease outbreak. But major shrimp is now vannamei species. They have a very less chance of getting impacted by disease outbreak. Isn’t it ? Correct me if I am wrong.
Avanti sells its products at the same price as competition, they do not have any pricing power per se…
As per the article, it seems demand will go up and production will increase which will be a good news for Avanti.
Last sentence of the news is important. US FDA have started more inspections at the border as well as at supplier’s plant. Not sure if Avanti’s plants were audited and approved earlier by US FDA or not. If not, this may be a beginning of major headwind for entire shrimp export sector. We know what happened in Pharma when US FDA upped its ante…
Disclosure - initiated tracking position
To me, there is nothing new that the above article is bringing out because of the following:
a) Few months ago, it came out that, starting from 2019, US will start tracking supply source of shrimps that are being exported to US. In a way, this is a positive measure, as it will put a stop to illegal farming. Even, MPEDA is supposedly taking measures to be in compliant with this norm (by issuing identification cards to farmers).
b) Inspections in a way, should foster the steps being taken by Indian companies to educate farmers against using antibiotics.
c) USD 3 mln is a meagre amount, when we look at the total shrimp exports out of India (and hence no way comparable to Pharma inspections being done by FDA).
My interpretation of the whole thing may be wrong. pls do your own due diligence.
Just not Avanti but the spurt has been across the board for all shrimp companies.
Avanti (+12.92%), Waterbase (+17.76%), Apex Frozen Foods (+5.00%)
Couldn’t find any particular reason in the seafood related news portals so far. Maybe the new shrimp disease reported earlier in China has turned out to be worse than suspected. Thai Union and CP Foods stocks have been sedate.
During the recent Aquaculture Roundtable Series, or TARS, conference in Chang Mai, Thailand, Robins McIntosh – senior vice president with Charoen Pokphand Foods (CP Foods) – flagged up shrimp hemocyte iridescent virus, or SHIV, as he forecast shrimp production in China will drop in 2018 to 512,000 metric tons. At the start of the year, an increase in production in China was being forecasted.
Could be the case. But, that item was published on 13th Sept, don’t know why it popped only today.
In other news, Seems like Soymeal prices has seen a sharp decline in the past week. [3 months trend] [15 days trend]. Can’t vouch for the accuracy of the numbers on this website. Came across this only today.
Don’t see shrimp prices moving up (on AquaBrahma app).
Edit: It could be operator driven too. The delivery% for today is 24.2% which is very low compared to delivery% over the last 15 days. But, Waterbase, Apex also went up significantly which makes me think this spike is more fundamentals driven than operators/technicals.
Partial List of goods which is Under new tariff list of Trump Tantrum. Is this positive for Indian Shrimp Food industry ?
Well, I don’t think anybody noticed, but a certain point in time in Avanti’s corporate film, you can actually see flies in the facility on the bags. I’m not sure whether Avanti takes great care with their shrimp or its packaging.
@aammiitt2 any clue what was the production forecast at the start of the year .
China nos are also in this article.
The report predicts that vannamei production is likely to increase from 3.03 million tonnes in 2017 to 3.64 million tonnes in 2020, with India accounting for 150,000 tonnes of that growth, Vietnam 100,000, Indonesia 80,000, Ecuador 75,000, China 60,000 and Thailand 40,000.
With the United States (US) government imposing an additional 10 per cent tariff on massive amounts of Chinese imports, including imports of aquacultured seafood products, the levy is likely to bring up more opportunities for Indian seafood exporters.
Exporters said that the imposition of additional levy will lead to increased demand from India due to better prices.
“The new levy will discourage exports of Chinese seafood to the US. India being the largest exporter of seafood to the US, it will open up more scope for supply of the perishable items and with good prices,” said exporters.
The new tariffs, effective from September 24, would increase to 25 per cent on January 1, 2019.
In 2017, the US imported roughly $2.7 billion worth of Chinese seafood of which roughly $1 billion was comprised of aquacultured seafood. The levy will be on aquacultured and wild-caught seafood products, as well as seafood products that are further processed in China.
“As on date, India is the largest exporter of seafood to the US. If China’s supply to supermarkets and food institutions of US drops, automatically, Indian products will be preferred,” said Rajen Padhi, director general of Utkal Chamber of Commerce and Industry and a seafood consultant.
The US’ additional tariff on Chinese products is definitely encouraging news for India, he added.
In the US, the Southern Shrimp Alliance has been consistently advocating for the imposition of additional tariffs through the President’s Section 301 authority on imports of farmed seafood originating from China.
“By recklessly tolerating the unprincipled use of antibiotics in Chinese aquaculture, seafood importers in this country have forced others to absorb the costs while they reap profits. President Trump’s additional tariffs appropriately level the playing field for all seafood producers – including foreign producers in countries outside of China – that supply the US market that have been trying to do right by their customers,” said John Williams, executive director of the Southern Shrimp Alliance.
Source : Business Standard…
Any chance that the import tarrifs would hit India as well?