Avanti Feeds

[Mayank.mail]

1. The current support provided by the Govt of India to Shrimp exporters to US (major market for Avanti) is above the acceptable limit of subsidy allowed by the US Govt and hence there would definitely be a negative impact post the final judgement due in Jan 2024; significant since 2024 happens to be election year in the US
2. Elections in India also in 2024 would benefit the small farmers at the expense of corporates like Avanti. Prices of raw material can be expected to remain high with high MSP announcements ahead of the elections…
3. On top the capacity expansion done by Avanti in the last year would ensure that the operating margins cant improve for few more quarters to come…

Give these three points i suspect the share price may consolidate for another quarter or so. lets see…

[never_overpay]

This is what I was able to come up with after doing some reading here and elsewhere (AR, earnings call, research articles, etc). A huge thanks to those who really dug and put up the information here in the previous posts. I have not read extensively but had a glance at Avanti Feeds and Sharat Industries and so the analysis is in the context of the shrimp sector mainly. Those of you who have been following the stock for a while, kindly correct/comment. A nice video on differences in productivity between the shrimp producing countries: https://www.youtube.com/watch?v=UnUci4BF97k&t=1213s)

What’s against the industry:

1. Competitively priced shrimp from Ecuador
2. The perception of Ecuadorian shrimp being better than Indian shrimp
3. If the US (AD and CVD) investigations concludes that government subsidies by both Ecuador and India are either “equal” or Ecuadorian subsidy is “less than Indian” subsidy or even after introducing the additional import tariff and dumping duty, Ecuadorian shrimp is still more competitively priced relative to the Indian shrimp.
4. Apart from Ecuadorian shrimp productivity (and output) already being superior to the Indian shrimp productivity (and output), if Ecuador ventures into Value added products and is able to scale, the Indian shrimp will further lose its competitiveness
5. Volatility in price of the 3 raw materials in addition to government intervention (in the form of minimum support price for Wheat and Soyabeans and a non-conducive policy for fish meal production/import)
6. Raw material prices remain relatively high throughout and do not come down as anticipated (Feed business is left with mediocre margins)
7. Inability to raise prices as farmers are price sensitive (shifting to fish, etc) and government intervention to protect farmers
8. A disease or virus affecting shrimp production in India (and asia/globally)
9. India is unable to adopt the technological advances for increased productivity (automatic feeders, mechanical harvesting, availability of electricity, lack of vertical integration and large-scale farming), hence loosing against Ecuador.
10. Although management has skin in the game, but slightly exorbitant salaries may indicate something – Are good times behind us? / Is Growth coming to an end?
11. Management becomes dumber: Either under pressure to meet market expectations or in order to justify the increased pay, they might expand into new areas (destroying capital or taking on debt). This might be unlikely but you never know with certainty with new blood coming in.
12. Their ability (and probability) to return to their original (or normalized) margins depends entirely on the upturn of the cyclical-nature (revival) of the shrimp industry in India. (THE UNKNOWABLE)
13. How bad could it get? (THE DEADLY UNKNOWABLE) i.e. The probability of the Indian shrimp sector being wiped out as a result of the fast and aggressive ascent of Ecuadorian shrimp sector, which has advantages of higher productivity, large vertically integrated players and proximity to US and Europe.

What’s in the favour of the industry:

1. The company has no debt and plenty of cash (most likely can withstand a prolonged downturn)
2. Capitalism at Play: If you consider the US to be the cradle of capitalism, and if the AD &CVD investigation levels the playing field for India and Ecuador, then there is a very good chance that things might get back on track with an upturn in the cycle. (The investigation against Ecuador and Indonesia is for selling in the US at less than fair value and govt. subsidies whereas the investigation against India and Vietnam is for govt. subsidies). If allegations prove to be true and the outcome/result of the investigation plays out positively, with the former two countries put at a greater disadvantage than the later, then this might result in the Indian shrimp becoming competitive and growth might continue with the upward turn in the cycle.
3. (For Avanti) Management has a proven track record of not making dumb decisions, being conservative and has skin in the game (I am fine with them hoarding cash). They might be slow, but are cautious – slow for not recognizing Ecuador as a threat and cautious for keeping cash for opportunities and not giving it out either as dividend or buybacks along with a strong reluctance to using bank debt (aversion to paying interest – I personally like that).
4. (For Avanti) The new areas of pet food and care are accretive to volume, growth and revenues – difficult to put a probability on how this might play out in the Indian market.
5. Adoption of shrimp as a part of staple food in India - a distant possibility, unlikely to happen in the short term
6. (For Avanti) – Growth from shrimp feed being consumed by Bangladesh and Sri Lanka – again very unlikely. (Pros – low cost of labor; Cons- lower productivity)
7. High returns on tangible capital (if the cycle turns normal)
8. (For Avanti) All the negative and uncertain aspects discussed above are priced in the stock (This is true from a valuation perspective only if you are investing on the basis of reversion to mean and an upturn in the cyclicality of the business/industry). However, it certainly is not cheap considering the above negatives – On a TTM basis AVANTI commands a PE of 16, an EV/EBIT of about 10 and an acquirer’s multiple of 14; and the fact that I cannot predict the normalised earnings with a reasonable degree of confidence. One might say it’s fairly valued with no debt and management with a decent chunk of skin in the game. (Multiples were calculated on a standalone basis for the core business and hence excludes other income form investments).
9. If the business cycle is up by the time the new processing facility comes online in March 2024, this could help them scale revenues, earnings and growth (both for Sharat and Avanti)
10. There was a recent month on month increase in US imports of shrimps from India – could indicate an uptick in the cycle (however, difficult to say/judge with Ecuador being a worthy opponent)
11. A new initiative of fish feed – this might need a while before it can be considered to be on the cards.
12. Freight costs have come down – but doesn’t help much overall
13. The raw material costs could decrease gradually once the new crop comes in, with prices of soyabean and wheat normalizing. However, this is speculation.
14. I could be wrong/inaccurate here: “The import of brood stock fell by as much as 40% from December to march 2023.” Might indicate lower overall output → decreased supply resulting in higher prices → more farmers in action next season → more consumption of feed → bumper supply before the cycle turns down again. The key would be to get out before the cycle changes direction, but the pot might be sweetened if the US investigation permanently shifts the scale on our side (this is too much to ask btw).

@harsh.beria93 @lakshay_agarwal @spatel @shyamdsundar - Any insights are highly appreciated. Thanks

[Rafi_Syed]

Very good insights from Chins

https://twitter.com/chins1729/status/1733343225602257303?s=46&t=VJ45_2YPpqETP-replA-bw

[Rafi_Syed]

Hendrix Genetics Expands Global Presence with the Inauguration of its New...

@harsh.beria93 @Chins any thoughts on impact current players ? My question is more on , who are going to buy from Hendrix, how this breeding cetner will help these players ?

[thakurvi]

Why any company wants to set up its new plant when industry is at highest headwinds? Does this means, good days are going to arrive for shrimp industries?

[Kasfur_Dhuniyan]

I have Gone through Many Article and thread To Understand Better Shrimp Industries
Here is My Take

Feed and Shrimp Processing Industries: India

“What Went Wrong in the Feed Processing and Shrimp Industries”

The world’s two major shrimp exporters—Ecuador and India
Increase in the capacity of Ecuador leads to oversupply and spiralling prices impacted Indian Shrimp Industry Badly Below chart shows how last 2-3 Years export of India Compared to Ecuador

How They able to Do This
Ecuador’s farmers have been increasing their output by using post-larvae that are tolerant to disease and grow increasingly fast; by using nursery ponds to shorten production cycles; by adding aeration systems and auto feeders to their grow-out ponds, which enable higher stocking densities

Ecuador supply at $7.42/kg where India Supply at $9.1/kg which leads to decrease the market share of India from 43% to 36% in 2-3 Years now again back to 36% in US

Ecuador has a lower cost of production of processed shrimp as processors there are large vertically integrated companies. Additionally, they have become the biggest producer of shrimp in past 2 years (from production of 600 mn to 1.5bn now).

Ecuador focuses on commodity products like headless shell on or head on, shell on shrimp

Raw Material Cost Increased for fishmeal, soyabean, wheat impacted the overall Indian shrimp Industries

Market expansion
Nearly 75% of China was made up of Ecuador shrimp market but covid restriction led to Aggressively focus product in US Market proximity to US coast reduced the Shipment transit time, faciliting Ecuador to dump its product in US Market leads to stiff competition to India where Shipment from India to US it takes Nearly 40 Days leads Further increase in fright and landing cost

What’s Happening Now

· Most of the Indian company under CAPEX and may commissioning of new plant will yield good topline growth and better ROCE

· US shrimp import market has seen improvement in past 3 months after 13 consecutive months of YOY decrease. However, realizations are lower by 10-15%

· In Indonesia and Ecuador, there might even be Antidumping Duty by US Countervailing Duty

· Company To Watch out: Avanti Feeds, Sharat Industries, Apex Frozen, Coastal Corporation

· Avanti a Market Leader Needs to closely monitor, company at bottom price, cyclical benefit may play out ,the PE at Lowest as compared to Mean PE of 5 Years

[Kavee_Dhakshan]

Ecuador shrimp industry lost $1.5 billion in 2023

[PrashantModgill]

Let’s also add a looming Civil War in Ecuador.

Things are getting very very interesting indeed

[Dhruv_Galada]

Yes, seems like a significant development. Market seems to be recognizing as shrimp stocks are making new 52 week highs on strong volumes. Interesting how it plays out.

“Much of the violence has been in Guayaquil, the port city around which most of Ecuador’s shrimp production takes place.”

“The unstable situation in Ecuador will have an effect on the logistics and operations of shrimp trading, according to seafood trading firm Roda International.”

Ecuadorian National Aquaculture Chamber condemns “chaos and terror”...

Ecuador President says country 'at war' with drug gangs amid violence

Ecuador’s shrimp industry ‘on edge’ as security challenges reach alarming levels

[siddhakkohli]

KEY POINTERS FROM THIS ARTICLE

The Ecuadorian National Aquaculture Chamber (CNA) has questioned the bill, specifically article 13, which proposes that taxpayers make a monthly self-withholding prepayment of up to 3 percent of total income obtained.

Those costs are set to increase further with Danish shipping giant Maersk’s announcement of its plans to move its operations from the Port of Guayaquil – close to shrimp-farming operations – to a deepwater port in the town of Posorja, 90 kilometers away. The move, slated for the beginning of 2024, would cost shrimp farmers an extra USD 400 (EUR 366) per container, Camposano said. Besides the cost of transport itself, the container’s generator would need to run extra time to keep the cargo refrigerated, and security guards need to escort the cargo to protect from theft, he said.

Ecuador's shrimp industry facing increased taxes, costs, crime

[siddhakkohli]

https://www.bloomberg.com/news/articles/2024-01-12/narco-crisis-a-world-away-drives-rally-in-india-shrimp-companies

[siddhakkohli]

Couldnt this be a major threat for companies who are into shrimp farmings, unorganized market share will eventually increase if ban is lifted by US.
Difference in wild and farmed shrimps, source Quora
wild shrimps
Wild caught shrimp are superior in every way…the meat is firmer because they live in a world where water currents are a fact of life, where they eat the natural diet of their species and they are in an environment with no physical boundaries. The taste is also better for those same reasons. Interestingly, wild shrimp cook up with more colour than their farmed relatives due to their natural diet vs pelletized shrimp food.
Farmed shrimps
They are also absolutely fresh in my market but they are just not as good as their wild caught cousins. The colour is pale, the meat is not quite as firm and the taste less intense.
Although, Wild caught shrimp are more expensive

14th India-US Trade Policy Forum Meeting: India Urges Lifting of Ban on...

[saurabhgupta]

Can anyone explain what are the growth drivers that taking this stock in upward move?

[siddhakkohli]

As i was going through Indian shrimp industry all the companies are well performing since beginning of 2024,here are some reasons i have found
There various norms put up by US recently, also Ecuador government rule regarding increase in taxes, and there are some nacro gang terrorism in shrimp industry gong in ecuador.

Other than these avanti feeds is also entering in pet food business through a joint venture with a Thai company.

[rankamoksh]

The dirty business with the shrimps

[rankamoksh]

In August 2018 the company had guided to foray into pet food and fish feed but that never happened also, does thai union sell pet food in Thailand, most probably they would be selling similar stuff in India too.

[Learner_Raja]

They mentioned in the concalls around 2021-2022 that they are being cautious with deploying capital into pet feed and fish feeds due to COVID related uncertainty. if you look at the Q2FY24 concalls they have put these plans into action now. They are collaborating with Bluefalo Pet Care (Thailand) for Pet food and Thai Union Feedmill for Fish feeds. I haven’t gone through the concall for Q3 but hopefully they have more to add to this ongoing story.

[Ballaji_Vijayan]

My take on the concall. I did not appreciate how complicated the business really is. What i still do not understand - Can Avanti be fully integrated so they can control the supply chain?

My notes on the supply chain from last concall: Slightly better results. Ecuador is not a threat, they focus on low value Products. Main raw materials - fish, wheat and Soya 85% of the cost. Wheat and soya has MSP , minimum support price. Govt will keep price same or increase to show support to farmers during election time. On the other hand, Avanti can not increase the price of the feed as well. Fish meal price for export is all time high 150 due to Peru exports Collapse. (1) Raw Material dependency - fish meal, wheat, Soya. (2) Aquaculture will grow only of fer more get good price. (3) Exporters have to make profit from there So that depends on global demand/Supply. Its complicated supply chain with Scarce raw materials. R&D for raw material substitute is necessary. (4) Shrimp, as a premium protein demand is growing. China is a big importer now. With affordability increases, Shrimp demand expect to go up in long run.

[Learner_Raja]

@Ballaji_Vijayan

Govt will keep price same or increase to show support to farmers during election time. On the other hand, Avanti can not increase the price of the feed as well.

This is exactly why I have never gone full throttle on the company. I feel it always gets squished between 2 more powerful forces. I do not expect anything from Govt anyway (whatever comes will most likely be short term) and increasing feed prices would push farmers to move to fish farming. Pretty difficult situation in my opinion. I still have hopes tied to revival in the sector, let’s see.

Invested.

[lakshay_agarwal]

Avanti Feeds Q3 FY24 - Feb Concall Highlights in terms of Business, Risk & Growth Updates

Concern : One major issue I feel with Avanti is that they cannot pass on the raw material price increase to the farmers effortlessly, now even though they are able to benefit from the whole ecuador situation. I am not sure that the whole business model is that strong enough. What are your thoughts ?

Disc : Invested