ValuePickr Forum

Medium-Term Perspective: Avanti Feeds

Hi Friends,

In the recent times, there have been couple of articles on Avanti Feeds (Dalal Street magazine and TV interviews) and I have been thinking that the company is at a very interesting point given that they have shown superb leadership and quality in the feed business (which has become a cash cow) and the smaller contributor for the company (the processing segment) is going to be the growth engine for coming years. Management aims to be a $1 Bln turnover company in coming years. So I thought of sharing thoughts so that we can try to research more:

The Feed business:

  1. The company has grown rapidly over last 5-7 years and grown from hardly 7-8% market share to almost 40% now.
  2. The company has continuously gained market share despite tough times in industry (FY16 saw de-growth in the industry) and FY 17 had heightened competition in the feed business (industry capacity is now also double of the needed quantity)
  3. This gain in market share has come with improving balance sheet quality. Co has increasing negative working capital vs Waterbase has 90-100 days of debtor days and nil advance from dealer network.
  4. It seems that company is confident to be able to utilize the new expansion of 1.25 lac tonne done last year in the up-coming season.

But while discussing with others, I see that general perception is that processing business is not good and it may lead to poor earning quality. I think it may not be so:

  1. I have numbers of some unlisted processing companies and I see that they usually do 8-9% margins despite being in commodity area. While if we see the interviews of Mr. Indra he seems to be pretty focused on this expansion and emphasis is on value-addition. So i do see a possibility of a bit better margins than peers.
  2. Even if margins are not higher, I like the idea that this will be the new growth engine for the company. Mr. Indra has mentioned in latest interview that they aim to do 3500 Cr (vs 400 Cr today) from this segment by 2020!! So I like the idea that the feed business has become a cash cow and the surplus cash will be channelized towards say a 15-18% ROCE business rather than earning hardly 7-8% on fixed return instruments.

I think the company has come to a very respectable size and despite the problems in the industry etc, the numbers have been pretty stable. So if the overall business is able to maintain say 20% growth, then Avanti can’t be ignored and may lead to perception change and better valuation from markets.

Key negatives:

  1. The risks of the industry
  2. Heightened competition in the industry. Industry hasn’t grown much over last 2 years while everyone has expanded. Hence its important that there should be reasonable growth in the industry.

Views Invited

Regards,
Ayush
Disc: Invested from before

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Hi Friends,

Avanti has done extra-ordinarily well in Q4FY17. Before taking a call, I was waiting for Q4FY17 results of other players of this industry to see whats happening and some of the things are very very interesting.

Avanti has grown the fastest despite being the biggest players in the feed segment (7 times bigger than the 3 rd largest player of the industry Waterbase). So despite being at 45-50% market share, the company continues to grow at high rates and gain market share. Plus the company continues to be more profitable + the working capital keeps getting reduced. So in a way this feed business is a super cash cow! There is contrasting difference between the performance of this company and others. I’m sharing the updated comparative analysis sheet:

The difference in margins between Avanti, Waterbase & Sharat and the working capital requirements is contrasting!

Yes, fall in raw material prices has helped Avanti in margin expansion and one doesn’t know how long it is sustainable but its interesting to see that others like Waterbase, Sharat Industries haven’t benefitted - they have neither been able to grow nor expand their margins. So probably, Avanti is able to capture this benefit due to its brand value, preference with farmer, distribution network etc and has not been under pressure to reduce the prices and pass on the benefits. It was heartening to see that the company has undertaken expansion of another 50k tonne in capacity despite a big expansion done recently of 1.25 lac tonne and they seem confident to be able to utilize this capacity. So for FY18, we may see another 25% growth in the feed segment (co may do 80-90% utilization of the full capacity vs 3.4 lac tonne done in FY17)

Coming to the processing side of the business, the management seems very confident on scaling up with the new plant. They aim to do 350 Cr in FY18 and probably 1000 Cr in 2-3 years from new plant. Here is the updated comparative sheet:

I think Avanti can do well here too, as they have huge amount of cash surplus and they are trying to focus on the value-added segment (though it will be small to start with) but all the other companies in this area are under lot of debt and have to incur related expense while Avanti will have advantage of own funds.

On valuations - Yes, the valuations are no longer cheap, as in past :frowning: Lets see how things evolve.

Do share your views

Regards,
Ayush

Link to results of Waterbase - http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/f559c641-6773-4dc7-ae07-e5031319f8a1.pdf

Link to results of Sharat Ind - http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/34a6f270-b753-487e-814b-7f6335c7267f.pdf

Link to results of Oceanaa Biotech - http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/11f4346c-9fb7-471d-b2c5-442ba7303b8c.pdf

Link to results of Coastal Corp - http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/88274f24-3cd7-4cbd-80ab-fc566cbdf2bb.PDF

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