Hitesh sir, in case of a avanti v need to know how company fared in last downward cycle and above how long the last cycle last, to my knowledge they were in loss in last downward cycle, latest momentum investors need to take account of that period, I feel current perception among the investors is this could be a mild down leg in a booming shrimp industry, which they consider to be a fmcg type of business and sir what should the p/e of a cyclical business like this, may be not more than 15. Considering that it seems to me that it’s still expensive
If it isn’t obvious, I was the one who wrote this on Quora, right around the time Avanti Feeds was at its peak price levels. I’m not claiming exclusivity or saying that I had some crystal ball which can time the market perfectly.
But to me, the entire Shrimp industry rally was a clear case of a cyclical move. It was perpetrated by the discovery of the Vannameni Shrimp, which gave a massive advantage over the Tiger Shrimp. As a necessary partner in this industry, Avanti was just at the right place at the right time to benefit big from this trend.
If there’s one lesson we should take away from this, it’s that Market Share does not represent a Moat. Avanti Feeds had more than 50% Market Share in the Shrimp Feed industry at some point. That didn’t give them any sort of pricing power or recognition with their customers to help them during a down cycle. Ultimately, that’s what differentiates a franchise type business from a commodity type business.
I’m bad at predicting cycles and generally reluctant to invest in commodity companies. But in my limited understanding, an upcycle starts with a massive positive change in the underlying RM prices (So, for this cycle it was Vannameni over Tiger Shrimp). So, tracking that might be the only solace of investors still deciding to stay invested here. The tool by @phreakv6 makes it easier though.
Regarding the company’s performance in a downcycle, I think it will negotiate this downturn in its stride easily looking at the balance sheet and management pedigree.
Avanti results look more disappointing now because they are being compared to what was a one off year in the form of 2018. And in 2018, Avanti probably outperformed most other peers as the leaders usually do when the going is good because of economies of scale, market share gains etc. And now when the numbers are being compared to 2018 they are obviously going to look very poor.
It would be a good idea to compare the results of 2019 with an year like 2017. It will provide a more realistic picture for comparision.
Regarding when to buy , people would have different theories on when to buy depending upon how they think in terms of investing. In my own view, after disappointments of the past few quarters, I think we would get enough time to buy once the things improve for the company. First of all we need to wait patiently and see the first signs of things turning for the better for the company. Even if the stock price runs up 20-30% from the bottom (wherever the bottom forms) after the signs of improvement emerge, I would be happy to pay up as I would be buying on certainties. As of now I dont have much idea when things are going to change and how low the stock can go.
Regarding the PE to be paid for the company, I think for me it doesnt come into equation as once the things start getting on track earnings might go up in a strong trajectory. Current high PE is typical of cyclicals as explained by Peter Lynch. He maintained that its always a good idea to buy cyclicals when the PE at that time is high because cyclical bottoms are made on depressed earnings.
Well said sir, with such good pedigree avanti will command some premium, but on the behavioural side of investing I myself is confused regarding anchoring, let us go much depth into industry dynamics, like disease, kind of shrimp they are into.
It seems Mutual Fund houses are accumulating Avanti feeds aggressively. No. of shares owned by Mutual fund houses have doubled in October vs September. Reliance, DHFL Pramerica and Union have taken fresh entries in Avanti, whereas it seems Motilal Oswal has taken a tracking position in the stock. Mahindra MF has taken an exit.
|Sector||No. of Funds||No. of Shares|
If you are hinting that Avanti is a commodity type business, then outperforming peers in good times is counter intuitive to how commodity businesses perform. Laggards in commodity businesses have outperformed leaders especially when the gouing gets easy. Source: Commodity investing chapter from Parag Parikhs ‘Value Investing and behavioral Finance’
Also, @dineshssairam, You hinted that market share isn’t indicative of moat. As far as i understand, in the feed business, farmers are very reluctant to change feed brands due to the risk of ‘small changes being able to wipe out entire crop’. More like, ‘Don’t fix what ain’t broke.’ From that perspective, brand loyalty becomes a feature of this industry and market share is representative of a moat, IMO.
Disc: Invested - Take my opinion with a bag of salt
@Virendra - By laggards I think they mean the company’s stock. The small players with unfavourable debt dynamics are of course the most beaten down in down-cycle and in the up-cycle they provide the maximum returns. But when talking from a business perspective, the biggest well-managed player doesn’t get beaten down too much in down cycle so the stock doesn’t perform as well as the laggards.
However, as the demand peaks and supply isn’t able to keep up, the smallest players reach max capacity while the biggest player continues to do better capturing more market share and also posts the best numbers due to operating leverage and performs longer, as long as the supply-demand is still in favour. When the cycle changes, everyone gets beaten down depending on the stress in the cycle.
Yes, you are partly right. But, its not only the stocks.
The stock is a function of the underlying company. Laggard (debt-heavy, low margin or unprofitable) companies show much more robust growth in fundamentals during the upmove, largely due to the low-base effect. That, plus the beaten down stock is what leads to outperformance.
Lemme know if you think there are gaps in my understanding. @hitesh2710, would love to hear your thoughts as well
Q2FY19 Earnings Discussion Conf Call Notes: 11/20/2018
Feed Business & General Business Trend:
|Fish Meal (per kg)||76.13||94.40|
|Soya DOC (per kg)||31.02||30.42|
|Wheat (per kg)||21.32||22.96|
- Reduction in shrimp culture by 15-25% by farmers compared to previous year first half because of lower farm gate shrimp prices.
- Market share at 45% compared to 43% previous year first half.
- PBT margins of 10-12% should be sustainable.
- Feed prices were maintained in Q2FY19.
- No proposal of buyback at current time.
- Increase is receivables are due to seasonality effect. Have not increased credit period and still do business on cash-and-carry basis.
- Last year total feed demand was 10 lakhs tons. This year feed demand is expected to be 8.75 lakh tons because of reduced culture. Installed capacity is 80-100% more in India than what the consumption is. Avanti’s feed capacity utilization is around 70% currently.
- CAPEX in hatchery business is 12-15cr which will result in 6-7cr of revenue in FY20.
Processing & Exports:
Expecting to do 10,000 MT in FY19 representing 45% capacity utilization. Focusing more on value added products and expecting to do 5000 MT here.
PBT margins of 12-15% should be sustainable.
Processing business is relatively more CAPEX and Working Capital intensive than Feed business.
In FY17, non-US exports were 13%, and in FY18 non-US exports have increased to 35%. China doesn’t import value-added products.
Took notes while going through recorded call.
US Shrimp.xlsx (16.8 KB)
looking at the us import data of frozen shrimp in the last 25 plus years.
Imp to note most of India’s growth has been because of increasing market share in the US from 6% in 1989 to 42% now.
The US market has grown at a small rate of 3% CAGR only, while the Indian imports to US have grown at 10% CAGR. But since we already have a market share of 42 % in the US, we cannot expect such great growth rates in the future for the shrimp industry.
Given the fact Avanti also has 45 % market share in India , it can be expected to grow in line with the industry growth rate , which does not look promising at all.
one thing which can act as a trigger would be developing new markets for the Indian shrimp industry.
Disc - Invested
IMHO,it would be interesting to know what the management itself thinks of this situation.
Also how likely are they to grab further market share,how much headroom in terms of capacity do they have. Clarity on these items should help.
Disclosure : not invested but closely tracking…
Interestingly a reverse DCF to come at fair value of 450 requires a 45% growth rate. Avanti has averaged 60% CAGR EPS growth in the past
Not sure how you came up with that? 45% growth for how many years?
Its not right to use DCF for cyclical, so my model is probably wrong. Please ignore
India Ratings Affirms Avanti Feeds at ‘IND AA-’/Stable. Click here to read the report.
If you refer any rating agency report, it has mentioned strength and weakness of the business behind the rating given. It is up to us, where we should focus. (IL&FS was having AAA rating!!)
Learnt valuable lessons on cyclicity of business… good read…https://finception.in/stocks/avanti/?utm_source=subscribers&utm_medium=whatsapp
Exactly a year ago, Avanti story was full of messages (including me) about how the company/stock got all its ammunition ready to be the next large cap (though I would admit some of the boarders were cautioning about extreme valuations right in Aug 2017 and to be careful). Then, few unforeseen lollapalooza events (fall in shrimp prices+ lower off take from US due to extreme weather+ rise in raw material prices) and the entire sector fell down like nine pins (to the effect that few companies in the sector even shelved their listing plans)!! Lessons learnt and checklist studded with few more pointers now. Coming back to current situation, I feel shrimp prices/raw material prices haven’t recovered yet favorably and with Q3 being an off season for the sector, I am presuming there won’t be much buying interest. Hence, we may get buying opportunities at lower prices in the coming months and in this current market, there is no need to rush to buy (unless a positive black swan event hits the sector!!).
Not a buy/sell reco. Avanti is my largest holding and hence views are biased. Pls do your own due diligence.
Conference call transcript (20.11.18)
I believe the unabated rise in the stock price was due to misplaced enthusiasm. Management commentary + ground level checks have always pointed toward the cyclical nature of the industry. The very reason Indian shrimp feed players gained market in such a short span was a warning sign.
However, I still believe Avanti has run a tight ship and delivered on all fronts. Coming to the future of the industry - I believe Indian players have a significant opportunity in VAP. Also, the 20-30% growth majority of the analysts were factoring in, will be more in the range of 10-15%.