I am quite amazed by the short nearsightedness of many of the folks in the investment industry. Most of us are trying to interpret each and every news headline and bring some conclusion out of it. As Munger has said - to a man with a hammer everything looks like a nail. If one has a negative opinion on stock, he or she will try to derive negative conclusion from the news and vice-versa.
Rather than focusing on parameters that are beyond one’s control I would try and answer few simple questions that we can answer with certain confidence -
1. To start with, will Avanti survive for next 10 years?
With a certain probability I would say yes. This business has not been built over night. Management has built sustainable competitive advantages around its business by working very closely with the farmers, establishing teams on ground, building capacities and developing strong R&D. This sustainable advantage is getting reflected in its 45%+ RoE, strong balance sheet (huge cash poistion built over years), healthy working capital and a market share of 43% in domestic feeds business. When a player like Godrej Agrovet agrees to Avanti’s strengths it speaks volumes about the business.
How do you see competition from other companies like CP and Avanti?
It is difficult. If you look at Avanti Feeds, it was much smaller some time ago. Today, it is much bigger than [the Thailand headquartered] CP group. This is despite a fall in stock prices for Avanti. Its market capitalisation which was over Rs 12,000 crore is more of an order of Rs 6,000 crore now. The last two years were very good for the Indian shrimp industry as there was problem in Thailand and Vietnam.
Once you are sure about business sustainability with certain confidence, next question is -
2. Do we see sustainability of earnings for next few years with certain probability?
My answer would be yes unless a. people stop eating shrimps globally b. management does something really stupid c. some other country comes up in big way as a shrimp exporter to US and European countries or d. big player in feeds business emerges out of nowhere.
For me I don’t foresee either of a,b,c or d to be happening. People will continue to eat shrimps if not more at least at same pace in worst case scenario. Shrimp processors will need feed. Looking at the past history I don’t see management doing anything stupid. If they have survived through rough patch of pre-2009 era I think they will do reasonably well going forward as well. Vietnam or Thailand might re-emerge as an alternative to India but again its not going to be easy. Plus shrimps from Vietnam has far higher duty than the Indian ones so as to export to US. New competition coming in I find it very tough as elaborated in point 1.
3. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. - Warren Buffett
I have no clue how the earnings will shape up this year or next year. I doubt if the promoter can also say this with certainty. I am open to buy a business any day which can grow its earnings at sustained rate of 15% with RoE of 45%. Indian market history shows companies which can grow at sustained pace with reasonably high RoE than cost of capital will always command premium. You can check any of the consumer companies.
I believe if we can answer the above three questions clearly, we can cut through the noise confidently.
Cheers.