Hi Sunil,
Thanks for the info. This is Ayush’s expertise area - let’s wait for him to comment.
Btw, I had no problems buying a few hundreds today.
Hi Ayush,
Volume on this stock is extremely low. Till 10:45 AM in morning volume was 10. Does this signal any problem?
Thanks,
Sunil
Sunil,
In most of the un-discovered and good stocks we have seen that volumes are low and if one has to buy in big qtys then one has to make an effort. Personally speaking, I find low volumes a positive as it indicates to me that not too many people are interest and incentives for manipulation etc are low.
Coming to particularly Avanti, I feel volumes are low but decent and we have been able to buy our desired quantities.
Regards,
Ayush
Thanks Ayush.
Helped a lot.
Thanks very much Donald and the Hyderabad team. This is fantastic on-the-grounds research and sharing it with the wide world without a fee makes it all the more stupendous. Thanks for sharing.
Donald,
Here are the figures for the last 5 years (on a per kg. realization). It is safe to assume a 10% increase on a conservative basis for 2014.
| Particulars (Derived from previous ARs) | 2009 | 2010 | 2011 | 2012 | 2013 | 2014E |
| Feed price per kg. (in Rs.) | 27 | 33 | 36 | 43 | 49 | 53 |
| Processing price per kg. (in Rs.) | 486 | 442 | 550 | 609 | 564 | 620 |
Below are my impressions and projections after the field report:
Disc: I am invested
Positives:
a) This looks like a sustainable business (barring a major disease) for the next 2-3 years (if not more) as long as the average selling price realization is about $4. I think they can sustain for a certain period even below it, but safe to assume that $4 will be a cutoff.
b) Most of these guys are entrenched players (with 15 years of experience) and have seen the real lows of the business. They are seeing the good times only now. This bodes well for the future as they do know and understand the business cycle completely (and with a lot of experience)
c) There seems to be no particular differentiation in the products per se across companies - CP, Avanti and Grobest (manufactured by Grobest India). Unless there is a drastic innovation, it looks like the RM and the selling price move in sync for all 3 players.
Negatives:
a) Disease thingy is known to everybody as a black swan.
b) From an Avanti specific standpoint - billing to Srinivasa Cystine is a little off. A bit of calculation here. As per the Nellore distributor, Supplements are about 10-12% of feed sales. Now, Avanti's got 500 cr feed sales in FY13. Supplement sales would then be approx 50 cr. If I assume a 20% net margin, then we arrive at a 8-10 cr figure as net profit (which is in line with what the mgmt stated in the mgmt Q&A). However, given that they will supply to more and more farmers in the coming days, the supplement profits would have added to Avanti's profits. Why they would not merge Srinivasa Cystine with Avanti inspite of a common customer and a common channel needs an answer from the management (the obvious answer being, they wanted profits to be ploughed back to themselves rather than share it with all shareholders, but maybe the answer is not so obvious).
In summary, barring one slight negative, this looks good. Now, onto the projections.
Projections for 2014:
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014E | |
| Shrimp Feed Sales (in MT) | 14051 | 15984 | 36709 | 63485 | 103393 | 120000 |
| Shrimp Processing Sales (in MT) | 670 | 936 | 1327 | 1966 | 2551 | 5000 |
| Feed Price (per MT) | 26,930 | 33,002 | 35,841 | 42,764 | 48,540 | 53394.04 |
| Processing Price (per MT) | 486,418 | 441,560 | 549,586 | 609,156 | 563,583 | 619941.2 |
| Feed Sales (in cr.) | 37.84 | 52.75 | 131.57 | 271.49 | 501.87 | 640.73 |
| Processing Sales (in cr.) | 32.59 | 41.33 | 72.93 | 119.76 | 143.77 | 309.97 |
| Feed Sales net margins | 3.3% | 9.3% | 5.1% | 7.2% | ||
| Processing Sales net margins | 0.5% | 12.4% | 13.2% | 12.8% | ||
| Profit before Tax | 4.79 | 40.26 | 44.73 | 86.10 | ||
| Profit after Tax | 3.35 | 28.18 | 31.31 | 60.27 | ||
| EPS | 3.69 | 31.04 | 34.48 | 66.38 |
Of course, I have not taken the impact of Wind power (profit/loss), Other income etc. But broadly, we can expect around 60-65 EPS for 2014. First quarter EPS was about Rs.16.
The management had guided about 125000 MT in feed sales and 6000 MT in feed processing for this year. Given the labor intensive nature of feed processing, and given that there would have been so much demand that they could not have found so much labor cheaply, I assumed 120000 MT in feed sales and 5000 MT in feed processing. Even a pessimistic 4000 MT in processing would take us to about 55-60 EPS this year.
Avanti has been paying out close to 20% dividend payout. That would translate, assuming Rs.60 EPS this year, to around Rs.12/- and hence the dividend yield at current prices is about 5.5%.
I have not tried to project any market price at 60 EPS, and with a doubling of dividend as P/E is a function of the market.
Which brings me to think about market prices for a while. Valuepickr has ascertained that the market is very much sustainable at $4 of shrimp selling price. The global prices are around $8 and falling.
Wouldn’t the market see the global shrimp prices falling and not re-rate Avanti (the sustainability part will be known to the market only a quarter or three later)? Or am I being paranoid? 
Would like to have your views on the EPS projections, the business and how the market prices may react given my outrageous hypothesis.
Disc: As I had mentioned earlier, I am invested.
Thanks
Kiran
Kiran,
Some observations from my side:
1). Given Management projections of doing 6000 MT for the year, we should have seen atleast 100 Cr sales in Q1 instead of the paltry 55 Cr. So it does raise doubts about achievability of the figure for the year. Countering this viewpoint is the fact that we had met Management in July - where they already knew June figures:) . So it may as well be doable. We need to see Q2 figures - that becomes really important.
2). We should see much more than a 10% hike in processing realisations. Couple of reasons a) they have enjoyed good prices for the better part of the FY14 season. b) if you compare from FY13 levels - Rupee itself has depreciated by 25% (45-60).
3). There have been atleast 3 hikes in Feed prices during the year. So avg Feed realisations for the year will be much higher than Rs 53. This being an extremely good year for farmers - all feed manufactures will pass on/extract the most in feed margins this year itself - in anticipation of a weaker FY15.
I am trying to get in more feedback from Seniors/others invested in Avanti before taking the projection exercise further.
Kiran,
Re: Srinivasa Cystine/Supplement Sales
1). The 10% figure he quoted was the normal farmer spend on supplements - not his current sales.This distributor had sales of only 30 lakhs from Avanti Supplement sales in Fy13. And expects to do 40 Lakhs this year - whereas he has 20 Cr Sales turnover. Slow penetration/product substitution …may be.
The distributor mentioned pushing the products to farmers (for years being used to CP supplements, say) is easy - not a problem Sir - as he does 70% Credit sales!
2). Potential business from this Supplement Sales in couple of years should reach 8-10% or 80-100 Crs. This is at marked variance from Management quote of this business size being of the order of 8-10 Cr! (they didn’t say profits, they said size of business).
This needs clarification from Management - probably they do not have the full basket of products, the most important products, or the tie-ups/research necessary for making the breakthrough product substitutions (vs competition), as yet, Or…
Based on our information base so far and some further discussions, here are some ball-park figures from my side on the Shrimp Processing side
| Season | T/D | Qtrly* | Avanti FY14E | T/D for Qtr | Qtrly* Potential | Estimate FY14E |
| May-June-Jul | 30 | 2340 | Q1 | 80 | 2080 | 1381 |
| Aug-Sep-Oct | 20 | 1560 | Q2 | 70 | 1820 | 1800 |
| Nov-Dec | 20 | 1040 | Q3 | 60 | 1560 | 1500 |
| Mar-Apr | 20 | 1040 | Q4 | 20 | 520 | 520 |
| 5980 | 5980 | 5201 | ||||
| * Avg of 26 working days month | ||||||
Notes:
1. This is based on raw shrimp availability to a processor info shared by a big farmer/supplier during peak season months & afterwards
2. While peak season processing is upto 40T/day (and off-peak 20T/day) with big processors, we know (from mgmt Q&A that Avanti can do atmost 30T/day with current capacity.
3. The only explanation for Avanti doing much lower than expected processing and hence low Processing Sales of 55 Cr in Q1 - is that expanded capacity was not available for peak utilisation in Q1, AND as I will show in my next data-post, probably far lower realisations in Q1 (a pattern that repeats every year - importers know of the glut situation!!).
4. However try as they might, looks like they cannot exceed 1800T by much in Q2. hence yearly capacity is likely to cross 5000T but unlikely to cross 6000T!!
Here are some projections for the upcoming quarters, and for the year - based on educated guesses - and current market intelligence -after analysing quarterly patterns in previous years. (FY13 was an abnormal year for Feed RM prices & hence margins, else you will mostly find repeating patterns).
While gathering market intelligence is an ongoing exercise, and we will be refining this work-in-progress table on a continual basis, I am going to stick my neck out - and present what I think are pretty conservative/reasonable figures for the year.
| Avanti Feeds | Q1 | Q2 | Q3 | Q4 | FY14 |
| Feed + Processing | 270.07 | 306.59 | 215.80 | 211.80 | 1004.25 |
| Feed Sales | 214.81 | 184.19 | 120.40 | 180.60 | 700 |
| Feed MT | 38360 | 32890 | 21500 | 32250 | 125000 |
| Avg Feed/MT | 56 | 56 | 56 | 56 | 56 |
| 1H Feed/Year | 57% | ||||
| Processing Sales | 55.25 | 122.40 | 95.40 | 31.20 | 304.25 |
| Processing MT | 1381 | 1800 | 1500 | 520 | 5201 |
| Avg processing/MT | 400 | 680 | 636 | 600 | 579 |
| 1H Processing/Year | 67% |
Notes:
1. Feed realisations taken higher based on feedback - 3 price hikes already taken in the year
2. Processing realisations for the quarters taken - based on feedback of farmer raw shrimp pricing for the months+market pricing
And now for the real kicker.
This is really sticking my neck out :)
| Avanti Feeds | Q1 | Q2E | Q3E | Q4E | FY14E |
| Total Sales | 270.74 | 307.59 | 216.06 | 212.33 | 1006.72 |
| Feed | 214.81 | 184.19 | 120.40 | 180.60 | 700.00 |
| Processing | 55 | 122 | 95 | 31 | 304.25 |
| Wind | 0.68 | 1.00 | 0.26 | 0.53 | 2.47 |
| Total EBIT | 21.99 | 45.78 | 23.24 | 17.16 | 108.17 |
| Feed Margin | 7.54% | 10.50% | 9.50% | 8.50% | |
| Feed EBIT | 16.19 | 19.34 | 11.44 | 15.35 | 62.32 |
| Processing Margin | 9.78% | 21.00% | 12.40% | 5.00% | |
| Processing EBIT | 5.40 | 25.70 | 11.83 | 1.56 | 44.50 |
| Wind Margin | 58.28% | 73.50% | -10.37% | 47.15% | |
| Wind EBIT | 0.39 | 0.74 | -0.03 | 0.25 | 1.35 |
| PAT | 14.23 | 28.82 | 13.72 | 9.65 | 66.42 |
| Net Margin | 5.26% | 9.37% | 6.35% | 4.54% | 6.58% |
| EPS | 15.66 | 31.73 | 15.11 | 10.62 | 73.13 |
These projections DO NOT look conservative to me:). I am trying to rationalise based on market intelligence and further feedback. I reserve the right to keep correcting/ adjusting till we get this about right. A lot depends on how Q2 results pan out and we will know better - but I wanted to be ready with this exercise/and a model before that:)
Disc: I have vested interests in Avanti Feeds. I have been a buyer at 160+ levels, 200+levels, and recently at 220 levels too. There are RISKS in this counter
Hi Donald,
I broadly agree with your MT figures of Feed and Processing (although, we can always nitpick whether it’s going to be 120K MT vs 125K MT for feed and 4500MT vs 5200MT).
However, the blended margins projected by you for feed is 9% and for processing is about 15%. I feel they are a bit on the optimistic side. Nevertheless, there is no data point for me to argue one way or the other
In summary, we need not project EPS to the last rupee. I think we broadly agree that the EPS is going to be Rs.60 - Rs.70 this year (and a div. payout of 20%, div yield of 5.5%). That’s a pretty big range, I know. Let’s just say they are from pessimistic to optimistic range
Now, it’s just upto the individual investor whether he feels the stock is cheap at 4x P/E.
Kiran
Donald,Ayush,Kiran & all other ValuePickr gems
Its such an incredible service you are doing for the investor community.All I have to do is sit back,log in & BANG! Loads of info to imbibe.I seriously feel you guys should charge the registered members…you really DESERVE it.If we can pay 2% to our brokers,we can certainly pay more than that to such priceless service offered here.Thanks is not enough but I have to use this cliched term since there isn’t any better word to use here.So,THANKS & a big thumbs up to all the effort.Hope to be of some value in times to come,once my course is officially over.
Results for Avanti on 26th Oct.
In fact, this week many companies of Valuepickrs’ interest have Q2 results release. Accelya, Avanti, Repco, Alembic Pharma, PI, Piramal Life, Rallis India, Greenply etc.
Busy week ahead to see whether our projections meet reality or if they have had escape velocity from Jupiter
Awesome work from fellow valuepickers Ayush (spotted this at Rs 35 in Mar 2011!!!), Kiran and stupendous work once again from Team Hyderabad led by Donald (no praise is enough for their incredible ground work, Kudos!)
However, off late there has been unprecedented interest on Avanti with everyone almost deciding it’s a no-brainer buy all of a sudden
A note of caution here:
- Given the highest standards of Bi0-security and technological prowess in Thailand, it was majorly affected by EMS/AHPNS with devastating losses.
“…Since EMS was first reported in China in 2009, it has spread to Vietnam, Malaysia and Thailand, and now causes annual losses more than U.S. $1 billion. EMS outbreaks typically occur within the first 30 days after stocking a newly prepared shrimp pond, and mortality can exceed 70%…”
(http://www.gaalliance.org/newsroom/news.php?Cause-Of-EMS-Shrimp-Disease-Identified-107)
The disesase has now entered and spreading in Mexico.(http://www.undercurrentnews.com/2013/08/28/mexico-has-ems-confirms-lightner/)
So chance of another disease/epidemic is not so improbable for India.
-
The demand - supply gap causing prices to rise upto $8 has started correcting and already prices are hovering downwards to $4 levels. So periods of very high margin realizations are one-offs and should be treated that way.
-
Senior valuepickrs have amassed large positions at multiple lower levels (as supported by their disclosures) hence for them the margin of safety is much larger. In case of a black swan event, one can walk away with mild profits/no loss in such cases. For someone considering a large position at CMP, margin of safety is not that high.
-
Given the low liquidity in this counter a stampede sell to exit this counter might see much lower price realizations for large holdings.
Please note that the stock was kept in the Valuepickr Opportunistic portfolio mainly for above reasons, hence investors should take these into view before initiating/adding large positions.
Now some bullish viewpoints, excellent update on overall macro in this article
Hi Donald,
To get to the real thing behind Cystine, I downloaded their balance sheet for last few years 
It seems the management was honest during our interaction…the turnover was 8.65 Cr in 2013, 3.24 Cr in 2012, 1.06 Cr in 2011 and 1.22 Cr in 2010.
Though the profitability of the co has increased to 2.5 Cr in 2013 vs very small amounts earlier, the reason for increase could also be due to investments of about 25 Cr on their balance sheet of this co. (they have also reported an other revenue of 2.25 Cr in 2013). So it would be wrong to say its a very profitable or material business as of now.
Also, it seems this co is majorly owned by only one of the promoter - Mr. Indra Kumar and hence there may be some seperation.
Regards,
Ayush
Hi Ayush,
Excellent digging! So now for any unlisted company, we know whom to go to for the P&L or BS data
This gives credence to current Management-speak. However we should keep tracking - this business stream has all the potential to be 100 Cr annual business - from same customer segment - using same sales channels!
a) It is at 8-10 Cr levels now - first year of introduction
b) if they can introduce the full range of products - which may or may not be possible - they can easily scale up this business to above mentionend levels - as distributors say farmers will have to take Avanti’s products - 70% credit sales hold for Feed products as the big influencer.
We should question them on this, in detail - in next Management Q&A.
Hi Rudra,
Nice to see you back actively:-)
Yes - Rudra has sounded the right note of caution. And thank you for that. Everyone must be aware of the additional risks that this kind of a business/stock carries. This needs to be re-inforced as often as necessary
1). Many things can go wrong. Just the Phailin cyclone last 2 weeks - If it had struck Andhra coastal shrimp farms (like they did in Orissa) we might have seen a different reaction in the stock!
2). New disease/EMS may crop up sometime
While the actual damage caused by either of these above may be limited or negligible say (best possible scenario), the low liquidity on the counter as mentioned by Rudra is the bigger risk.
Just like we have seen consecutive 5% circuit breaks on the up recently, any negative news of the above nature can snowball quickly into consecutive downward circuits (irrespective of the extent of damage)
Everyone must be aware of these risks, should you choose to invest in Avanti Feeds.