Avanti Feeds

Stock Opportunities Not-so-Hidden Gems
1

Hi,

I have been following this company for sometime and the industry seems to have turned around in a big way and the future looks promising. I seem to have missed discussing the stock on valuepickr as I'm unable to locate an existing thread. Hence starting a new post:

Few weeks back we got the FY12 annual report of the company and the same is very promising. Here is an update:

Avanti Feeds: Annual Report updates

Posted onAugust 18, 2012by

![|509x241](upload://oI3y6Fznc7G7ZAW6KTeKAZ7xDgK.jpeg "Avanti Feeds - Annual Report 2012")

We discussed Avanti Feeds about a year back at Rs 35.The stock has been amulti bagger backed by very strong growthin revenues and profitability and is currently trading at Rs.145.

Financial Data of last 6 years(Figures in Crores):

FY 2007 2008 2009 2010 2011 2012 CAGR
Sales 121.74 102.83 73.00 96.16 207.75 393.41 26.41%
N.P. 1.67 0.88 (7.03) (1.2) 3.42 28.07 75.82%

Thereason for change in fortuneshas been due to introduction of new variety of shrimps âVannamei.Earlier Black Tiger variety was being produced which had lower density and hence higher cost of production.Vannemei is more remunerative for the farmers now.

It was encouraging to go through the FY 2012 Annual Report of the company. The undertone is very positive and as per it,Industry is expected to continue growing at 20- 25% for next 2-3 yrs. Avanti is aggressively expanding its capacity in anticipation of the demand.

Key Highlights of the Annual Report â 2011-12(Link to report):

  • Thai Union Frozen Products PCL (TUF) holds 25.12% equity stake in the company. Mr.Wai Yat Paco Lee has been appointed as a director representing TUF. TUF is one of the largest seafood exporter company in the world.
  • The overall Shrimp culture was very encouraging and rewarding for the company. Its the second consecutive year where the overall increase in the shrimp culture both in terms of water spread area and density of culture was by around 25%.
  • The main reason being shift from Black Tiger shrimp cultivation to Vannamei shrimp cultivation.
  • The improvement in the international prices for shrimps has also encouraged new farmers in taking up the shrimp cultivation.
  • Strong sales growth by 125% in the Shrimp Feed segment. The processing and export division sales increased by 58.4%.
  • It is the most preferred brand by the farmers due to maintenance of high quality and constant technical support to the farmers.
  • The Government of Indiaâs support and emphasis on Vannamei has also resulted positively
  • First quarter of 2012-13 itself has witnessed overall growth rate of 20% of the industry
  • The dividend has been increased to 65% from 10% last year.

Expansion Plans:

  • It is in process of buying a land near Chennai to set up hatchery in collaboration with THAI UNION
  • During the year the company has doubled its capacity by replacing old machinery with the new ones and constructed new godowns to handle increased volumes.The capacity has increased to 1,10,000 Mts p.a from 52,000 mts p.a.
  • The shrimp processing capacity has increased to 8000 Mts p.a from 2720 mts p.a.
  • As the demand anticipated by the company is slated for a big jump in a couple of years from now, further expansion would be needed as current capacities would be insufficient. Therefore, 4.94 acres of land near their current plant of Kovvur is already bought for expansion.

Risks:

  • Dependency on climatic conditions makes it unpredictable. Natural calamities like floods, cyclones, during the culture season can have serious impact.
  • Shrimps getting affected by virus and diseases also is a threat.

Our View:

The industry has had a poor past till 2008 but the recent changes in the industry are very strong and augurs well for the good players. Avanti Feeds is one of the biggest and perhaps the most efficient player with a significant tie up with worlds largest Seafood company Thai Union Frozen Products. TUF holds 25% stake in the company.

If the industry is to maintain 20-25% growth for next few years then Avanti has a good opportunity to capture a good business and make the most of it. We feel that the stock has potential and monitoring of performance is needed.

Analyze the company on our Screener

Would be good to have views of members.

Ayush

12 Likes
2

Hi Ayush,

For the industry, Revenue growth prospects are good. However, margin can come under pressure due to raw material cost increase.

Look at Simran Farms in similar industry as an example. Its best to buy these after low margin times, I guess, than after good margin times.

What say?

3

Jatin,

Haven’t looked at Simran Farms, the good thing about Avanti Feeds seems to be the strong visibility for growth + it is trading cheap as of now.

Ayush

4

Hi Ayush,

Great potential find again. Incidentally, in my screener, this company popped up and eventhough, historical record is very ordinary, I do see turnaround in the industry for sure. With TUF having close to 25% stake in the company does instill confidence and will give AFL lot of leverage. I just digged about TUF, and seems to have dominating position in seafood industry. It can open up lot of vistas for AFL as well. Looks very interesting at 5.7 times TTM. If we deduct Cash + investments net of debt, it is even cheaper. Another advantage is the NWC requirement is limited in the business when combined with asset light business (Asset turnover jumped from 1 to 4 in last 5 years) means that if margins settle down around 5.5 -6% ( realistic considering TUF 's margins) it can achieve 20% + ROE easily. I will dig deeper as I sense large upside here without taking too much of risk.

Any idea of management pedigree and integrity?

Best Regards

Dhwanil Desai

P.S. Apparently for last 6 months, it is getting re-rated but still looks attractive on valuation front.

3 Likes
5

Vivekji has been asking me to look at this company long ago. The reason I decided to not to research much on it is because of the primary threat/risk that is associated with all living thing, diseases.

When you are dealing with living things, you are exposed to the unknown world of genetic mutations, and the resulting potent, drug-resistance viruses, which can create havoc to your business. Another issue is that these viruses are not as well studied as in case of human ones, so that amplify the risk.

Example of such risks in past: some potato disease in ireland, which created famine there, bird flu, SARS virus.

2 Likes
6

another reason to be wary given the low awareness or concern of such things in India :http://timesofindia.indiatimes.com/city/bhubaneswar/Japan-refuses-to-buy-toxic-shrimp-from-Odisha/articleshow/16511414.cms

1 Like
7

Hi Dhwanil,

I really like your thought process :slight_smile: Yeah, the industry has turned around in a big way and their association with TUF will help them in remaining ahead of the competition.

Yes, over longer term the margins may fall as the competition will increase but over longer term 7-8% might be sustainable and if so then ROE should be more than 25%.

Like you pointed out the trigger is that its a asset light business and hence they can capture the potential very quickly. Their FY12 annual report looks very promising. I won’t be surprised if they do 700-800 Cr turnover in 2-3 years.

I think the mgmt quality is high and promoters are very honest.

Ayush

1 Like
8

:))

Hi Ayush,

I looked at the industry dynamics more closely. One structural issue that I found is that diesease outbreak/health regulations are major risk to the industry as a whole as one devastating season will have impact on next year’s farming acerage and it will directly impact the feed business. Recently, processed shrimp price realization has come down from high levels prevailing in last years so shrimp pricing seems to be having a volatile trajectory ( Q1 2012processed shrimp revenue (export)is 10.7 crores vs. 28 crores in Q1 2011). So, diversification by Avanti Feeds into processes shrim export + feed + ready to eat/cook (when scaled up)may help reduce volatility risk in its earning. As of now, I get a feel that unless the basic unpredictability of revenue stream is addressed, market will only assign low multiple and hence most of the gains will come from earning growth. As you rightly suggested , if management is able to walk the talk, it can easily double its revenue in next 3 years. And then if earnings become more predictable (due to maturity of the industry and diversified revenue stream), stock may get re-rated to higher multiples.

I took 5.5 % margin, as TUF’s margin hover around that number which I think can be a benchmark for longer term unless the cost structures are very different.

Best Regards

Dhwanil Desai

9

hey folks,

following are the few things that make mesuspicious about “avanti feeds”.please have a look

**1). **Aggressive revenue recognition policy: the companyâs revenue is recorded when goods are dispatched.

**2). **DOS has gone up from

**7.76 in FY10 to 20.5 in FY12. **

**3). **Bad debt and doubtful debt has grown significantly as a percentage of previous years A/R from 3% for FY11 to 10% from FY12. It went up from 7.68 lacs in 2011 to 150.78lacs in 2012 ie: by 1900%!

**4). **The company had set up shrimp shell manufacturing plant in 2000 it has remained idle since 2007 and the company has been carrying it, it has written off the plant recently.

**5). **It has taken Rs. 200 lacs loan from associate companies in 2011, which it doesnât consolidate.

**6). **The company engages in related partly transactions which include Rs. 644.48 lacs of purchase and a royalty payment of Rs. 145.09 lacs in FY12.

**7). **The companyâs inventory valuation policy has changed recently, before raw material and packaging material were valued at lower of weighted average cost or net realizable value and now they are valued at weighted average cost.

8). The company had planned to start a vennamai hatchery with Mr.Anil gorge in the form of a joint venture of 51:49 in the year 2008-09. But this did not progress. The reason given was shortage of good seeds. Then they said âwe plan to start the hatchery in the current year and the first batch of seeds would arrive in September â10. (directorâs report 09-10)

In the nest annual report in MD&A the company mentioned that they had set up a vennamai hatchery on lease basis to supply good quality vennamai seed to farmers. The company has plans to set up a fully fledged hatchery and multiplication centre in due course with technical collaboration of thai union. (annual report 2010-11)

The company is operating a vennamai hatchery on lease hold hatchery to supply good quality vennamai seed to farmers. The company has been planning to set up state of art vennamai hatchery in south india with technical expertise of thai union for which it has been scouting for appropriate location and a suitable land. After a detailed study the company has now identified a suitable location near Chennai and efforts are to buy necessary land to set up the hatchery. it is expected that it will be built and commissioned in an years time from now. (annual report 2011-12)

(the company has been mentioning about the hatchery for past 4 years, but nothing really has happened till now)

9). In year 2008-09 the company invested in Avanti aqua feeds pvt limited an SPV to set up a shrimp feed manufacturing plant in gujrat along with TUF in 50-50 equity participation. Next year the proportion changed to 51:49 and the company said commercial production is expected to start by mid of julyâ11 and in 2001-12 the company consolidated the SPV.

(the change in proportion looks fishy!)

please give youropinions!

1 Like
10

so nobody else thinks any of the above is of any serious concern?

would like to know more from the experienced.

11

I checked on thai union website it does say 50:50 in Avanti Aqua feeds. the website is clearly outdated since it mentions thai aqua feeds post amalgamation.

does anyone else have the experience to see if the related party transactions

are fishy ?

bad debt

written of is 5% of NP, which indeed is high. the debt is probably given out to shrimp farmers.

i did find the mention of vennamai hatchery in earlier ARs, which they have set up. hence the change in the outlook and price run of 400%. but did not find mention of hatchery with technical collaboration with TUF in earlier 2 annual reports. but maybe i did not look carefully. it will be interesting to see if they actually purchase the identified land and setup the hatchery in the coming year. that would be a big confidence building measure.

is there anyone located in hyderbad or otherwise who has visited avanti feeds facilities? or even their prawn king outlet? any feedback in this direction would be very helpful.

disclosure: avanti is among my top 5 holdings. acquired recently @ 200.

12

Hi Shrey,

I have been following this co for sometime and my feel is that the promoters are honest and leaders in their field. They have been really transparent about the business operations in their annual report and its commendable for a small co like theirs. Here are my views on your queries:

1). I think the policy is same for most of the cos. Also if its consistent over the years, it hardly matters.

2). Debtors are a function of turnover. If the turnover is increasing, the debtors also increase.

In this case the % of debtors has fallen from 9% of turnover in 2010 to 4% of turnover in 2012. And I think this is a huge positive!

3). Look at the materiality. 1.5 Cr of bad debt in a high growth co with 400 Cr turnover and 28 Cr NP is not high, IMHO. This is normal. Good thing is that it has been provided.

4). Again, I don’t see anything negative. Infact if they have written off the plant then its a positive.

5). Associates don’t need to be consolidated.

6). Royalty payment would be to the foreign co - TUF and its again a good point. Related party transactions of 6 Cr is again not high for a 400 Cr turnover co.

7). I think its the style of writing. As per Accounting standards, inventory is always valued at cost (either normal or wtd. aveg) or net realizable value whichever is lower.

Not starting of some areaproposedearlier though negative but may also be during the normal course of business.

The JV has not been consolidated into the listed entity and I think the swap ratio was favourable to the small shareholders.

Shrey, though you have gone into details but I think its important to look at thesignificanceof things in terms of growth & size of company.

Thanks & Regards,

Ayush

7 Likes
13

Ayush,

I have been looking to add this for quite sometime. It ran up a bit fast for my liking. I was expecting a mini-correction with the shrimp ban and all. Then the positive outlook with the government getting into action, I have not bought into the company.

With 2 year time-frame, would this be a good time to enter or can I wait for some correction ?

Regards

14

hey folks,

I recently spoke to someone who has an experience in the shrimp industry. following is an abstract of the same.

shrimp feed is mainly made up of rice chaff left after the extraction of oil, soya cakes and some verity of dal. Out of which rice chaff is the cheapest. Greenvegetables are fed to them to make them disease resistant. They also eat some insects, so some special verities of trees are grown around the ponds. The need approx 3 months to grow from eggs and can be sold out when they are 4 months old. A close eyes needs to be kept to ensure that the dead ones are removedimmediately so as to avoid the others getting affected. diseases are verycontagious in these organisms.

frequent netting has to done in interval of 3-4 days for the followingreasons.

  • to remove the big ones from the small ones to avoid small ones getting killed in the race of survival of the fittest.
  • to keep them healthy as it serves as anexercise and ensures robust growth.

The ideal soil to be used isclay silt mixture or sandy loam. The farming is poised to besuccessful incoastalareas and river basins.

On the verities and the reasons for shift inpreference globally.

black tiger prawn use to be thepreferred verity not long ago. It was used for eating as well as for medicinal purpose (in sexual diseases for stimulation) off late the white shrimp or the vennami species has become the main stay of export industryfollowing are the reasons for the same.

  • White prawn is a touch less saltier in taste and so tastes better.
  • It is cheaper to cultivate.
  1. in the same pond 2.5-3 times white prawn can be cultivated. They require less oxygen.
  2. their meat yield is higher.
  3. They grow faster.
  • They are more resistant to diseases.

The black tiger prawn is famous in asia. But off late japan has rejected few export consignments stating that anti-oxidant levels are high in the prawns.

in short the black tiger prawn future looks dark and white prawn’s is bright.

The same is evident too.

Regards!

4 Likes
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NOTE:The above post is all about indian shrimp industry and everything other than black tiger shrimp isrelevantfor avanti feeds.

16

hey folks,

The following is theskeleton of the Management Q&A. Ayush and me have prepared. Kindly look at it. Yoursuggestions are most welcome.We will incorporate all the suggestions and prepare a final draft. :slight_smile:

1.avanti feeds HAS MADE RAPID PROGRESS OVER LAST 3 YEARS. SALES HAVE GROWN AT A 3 year CAGR OF ALMOST 75% and PROFITS HAVE GROWN FROM A LOSS OF 7 CR IN 2009 TO A NET PROFIT OF 28 CR IN 2012. CONGRATULATIONS!

Kindly share with us this journey and the key factors responsible for such an impressive growth performance. What have been the main drivers of this growth?

As per the reports, change in business is due to adoption of Vannamei species v/s the earlier black tiger. Why was black tiger popular before? Why is vannamei better? What are the differences?

What are the limitations of vanammei? How long can this adoption and switch to vannamei continue? Any risk of disease etc in this specie?

4). THE company seems to be on the GROWTH TRAJECTORY,THERE HAS BEEN A MAJOR SHIFT IN dynamics of the industry in last 3 years. OPM (11.54%) AND NPM (7.37%) HAVE JUMPED UP BY 6-7% IN THE LAST 1 YEAR.

What changes have you effected in your business model to bring about this focus on improvement in operational efficiency?

Where do we see the sustainable long term operating margins? Last yr the OPM was about 11.50%…is it sustainable?

One of the key inputs is soybean and its prices have risen by about 50%. Will this affect the margins and by how much?

Will rupee weakness help the margins and vice versa?

5). SALES GROWTH VS PRODUCTION GROWTH. WHILE PRODUCTION IN FY112 HAS GROWN BY , SALES HAVE GROWN .

This is an exceptional performance, which needs to be properly understood. You have mentioned higher input cost, better price realization, value additions as factors. Kindly elaborate on the extent of contribution from each of these factors.

6). PRODUCT SEGMENTS AND CONTRIBUTIONS

Which segments are expected to drive growth in next 2-3 years, where is the companyâs focus and why?

how are the margins and prospects in the other segment?

7). CUSTOMER SEGMENTS

Kindly share with us the quality of business and the level of business with your major customers in shrimp processing and export. How much do your top 3 customers contribute to revenues? Where are they located? Is there any single customer contributing more than 10% of Sales?

8). EXPORT as a percentage of total sales has come significantly in last 5 years and currently stands at 27.7%.

Why has the focus shifted from export? Is this trend expected to continue?

9). SALES & MARKETING SETUP & PROCESSES FOR DIFFERENT SEGMENTS. EXPORT AGENTS

Kindly explain your sales and marketing processes & set-up for the different segments. (Especially feed business)

10.THE shrimp & fish feed MARKET and processed export market. THE SIZE OF THE OPPORTUNITY BEFORE AVANTI FEEDS.

What is the size of the current market being addressed? Where do you see the company 5 years from today? What are the major challenges to reach there?

At what rate you expect the industry to grow? And at what rate do you expect the company to grow? For how long can a high growth rate be expected?

By when can we expect Avanti to be a 1000 Cr turnover company?

11.shrimp feed MARKET WOULD SEEM TO BE A LOW-BARRIER-TO-ENTRY MARKET. BUT YOUR DOMINANT PERFORMANCE SEEMS TO BE TELLING A DIFFERENT STORY.

How do you ensure your customers stick to you? What kind of technical support do you provide them? How valuable are those support to them?

Does the technical assistance get you relatively cheaper and reliable supply of shrimp for processing?

Have you been able to pass on the rise in input cost to the customers?

Who are your major competitors? Where does your product stand compared to your peers? Do your competitors also offer support services also? How do you counter competition?

In late 90s and early 2000s , lot of companies had ventured in aqua business and burnt their hands. Why did people come in and what went wrong?

12.CAPITAL EXPENDITURE.

You have mentioned about the several expansions. What kind of capex will be involved and by when can we expect them to be in working condition?

What additional benefits do you see coming from this development (by how much is it expected to improve the margin)? By when is it expected to be in operation? What kind of capex will be required going forward?

What will be the contribution towards margin expansion, if any, on account of this?

No wonder Fixed Asset Turnover has doubled form .84x to ~3.52x in last 5 years. Again maximum improvements have come in last 2 years.

Is it an asset-light business model? do you expect this to grow further? and what level do you think is sustainable in the long run?

Please share the companyâs philosophy, processes, and how you have gone about implementing such extraordinary productivity and efficiency improvements.

13). RAW MATERIALS âwheat, soya doc and shrimp

RM has declined as a percentage of Sales. Kindly explain how the company manages raw material price volatility risks. Are you able to pass on price increases?

14). RISKS.

What does the company do to mitigate the risk of shrimp getting affected by diseases?

Still a significant portion of the export is to USA. does the company plan to continue this strategy in the future?

What are the measures the company is taking to mitigate risks on this front?

Japan has recently sent back consignments and has become strict about the presence of anti oxidant. How has it affected you? And how severe is the effect going to be going forward?

How do you mitigate risk such as weather and anti-dumping?

15). What is the current status of the power plants you had invested in and what are the plans going forward?

16). How has the equity participation from TUF helped the company? Do you export to TUF and hence have better margins?

17). What is the dividend policy going to be the years to come?

1 Like
17

hey folks,

The following is theskeleton of the Management Q&A. Ayush and me have prepared. Kindly look at it. Yoursuggestions are most welcome.We will incorporate all the suggestions and prepare a final draft. :))

Hi Shrey and Ayush,

Excellent work. You have covered breadth and depth of the business.

Best Regards

Dhwanil Desai

18

Thanks Shrey & Ayush.

This looks comprehensive - I dont know much about Avanti/comp or the Industry.

http://www.mpeda.com/inner_home.asp?pg=aquaculture

The Marine Products Export Development Authority maintains a site with all the Exports stats going back to 1960s. You may like to use this data set to quiz more on the slack in Exports/geographical diversification/competition, etc.

Understanding the business models of different players in the Industry may be important. Only listed players seem to beWaterbase and Uniroyal Marine Exports.

19

Excerpt from a Quantum AMC market report

Aquaculture: India exported 3.13 lakh tonnes marine products worth Rs 6,679 crore, or $1.4billion, in April-September 2011. Compared to this period a year ago, there was 0.12% growthin volume, 19.91% in rupee earnings and 23.01% in dollar earnings. This shows that theweakening rupee helped Indian seafood exporters. During the first nine months of financial year2011-12, Avanti Feeds and Waterbase surged 240% to Rs 123 and 269% to Rs 15.85,respectively.

Avanti Feeds manufactures shrimp feed. During the quarter ended September 30, 2011, itregistered a 524% rise in net profit. Frozen shrimp continued to be a major export, accountingfor 58.41% earnings in dollar terms. Shrimp exports rose 19.34% in quantity, 32.90% in rupeeand 36.74% in dollar terms.

Waterbase operates a fishery. It registered a profit of Rs 2 crore in the quarter endedSeptember 30, 2011, as against a loss of Rs 63 lakh in the same quarter last year.

“Floods in Thailand helped these companies. They have a high export thrust, so a weakeningrupee is an advantage for them,” says Alex Mathews, research head, Geojit Paribas FinancialServices. He is bullish on the sector for the medium term due to the possibility of furtherweakening of the rupee.

1 Like
20

Excerpt from a Quantum AMC market report

Aquaculture: India exported 3.13 lakh tonnes marine products worth Rs 6,679 crore, or $1.4billion, in April-September 2011. Compared to this period a year ago, there was 0.12% growthin volume, 19.91% in rupee earnings and 23.01% in dollar earnings. This shows that theweakening rupee helped Indian seafood exporters. During the first nine months of financial year2011-12, Avanti Feeds and Waterbase surged 240% to Rs 123 and 269% to Rs 15.85,respectively.

Avanti Feeds manufactures shrimp feed. During the quarter ended September 30, 2011, itregistered a 524% rise in net profit. Frozen shrimp continued to be a major export, accountingfor 58.41% earnings in dollar terms. Shrimp exports rose 19.34% in quantity, 32.90% in rupeeand 36.74% in dollar terms.

Waterbase operates a fishery. It registered a profit of Rs 2 crore in the quarter endedSeptember 30, 2011, as against a loss of Rs 63 lakh in the same quarter last year.

“Floods in Thailand helped these companies. They have a high export thrust, so a weakeningrupee is an advantage for them,” says Alex Mathews, research head, Geojit Paribas FinancialServices. He is bullish on the sector for the medium term due to the possibility of furtherweakening of the rupee.