My thesis on water base is fairly simple and straight forward:
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the company is a no.2 to market leader avanti feeds and has the benefit of tail winds in an growing shrimp feed market in India.
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the promoters have a stellar reputation amongst the shrimp farming community and their products are well liked
3.water base went through a CDR and a difficult time during 2011-14 when the market took off - avanti made the most of it and literally left it in the dust. Post CDR and now with amalgamation of the promoterâs company pinnae foods, they will triple capacity to 1,10,000 tonnes p.a. So with the same cost structure they can literally do 3-4 x of current revenues
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the thapar groups scion has come in - professionally educated in the USA, he is driving change. The foremost of that is bringing in a new CEO - Mr. Ramakant Akula who comes from a sales and distribution background and is expanding distribution to improve topline
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india is a peninsula and has immense potential for shrimp farming - states like orissa, west bengal, gujarat have just got onto the bandwagon to help impoverished farmers who live on saline coast lines come up from poverty. This is a big opportunity as most of these areas are not arable
6.water base is integrating both backward and forward by getting in to hatcheries (which is a 20% ebitda margin business) and processing of shrimps (which is a low 4-5 % ebitda margin business but helps expand the farmerâs market as they get assured of buy back of their produce).
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scuttle butt on the ground indicates 25-30% growth in water base and a 10-15 % for the market leader avanti. this is without pinnae foods - which when added will add about 15 % to the growth - to say 40% or so
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this is a simple business - very similar to FMCG - high asset turn over, stable ebitda margins,
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upside from things like hatcheries which are high margin are optionalities that can add to ROCE.
financials
in FY 2016, they did about Rs. 300 Cr. and pinnae foods did about Rs. 40 Cr. in topline. They can grow at about 40% a year on a combined base for the next two years. That makes it about Rs 700 Cr. with a 11% EBITDA margin and a 7 % PAT margin (taking margins about 100-150 bps lower than avanti).
Given that for FY 18, one is looking at a PAT number of about Rs. 50-55 Cr. or so at the very least. Lay on top of thios, the Rs. 18-19 Cr. of insurance money that the company will get for the Rs. 20 Cr. loss in plant that they took during december 2015 - chennai floods which will add to the cash straight. This should translate into an EPS of about Rs. 20-25 in FY 18 without exceptional items should there be no black swan risks which are not uncommon in the shrimp business.
Given this and applying a multiple of about 12x, a Mcap of about Rs. 600-650 Cr. is quite possible that translates into an upside of about 50% from here in about a yearâs time. There are multiple themes playing here and I always use the analogy of a boeing 747 in investing - there are four engines that power shareholder returns :
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improving capital turn over - should happen given that capacities have been set up and now any sale will result in operating leverage
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reducing debt - the company has come out of CDR and has been consistently shrinking their debt although WC remains elevated given the sales growth they are pushing for
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improving margins/increasing operating leverage - as they sell more, their fixed costs get amortized over a larger base and hence produce a disproportionate amount of cash flows
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rapidly increasing sales - again topline is a key engine that powers operating and free cash flows in such a business
I have seldom seen an aircraft crash whenever itâs had these four engines firing simultaneously. Infact, this creates disproporationate wealth - given that I see an asymmetric upside in water base.
Risks;
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this is a highly volatile business with black swans surfacing sporadically - any shrimp disease can wipe out the company
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the US had rolled back anti dumping duty on indian shrimps in 2014 - however, recently the anti dumping duty was clawed up from about 2.77 % to about 5 % now - while not insignificant, it is my belieft based on interviews with people on teh ground that this 2 % differential can be absorted by farmers. However, any future hikes can lead to elasticity of demand
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any roll back of professionalization of the company can result in a slowing growth - a key part of my thesis is that the thapars have become outward looking with the entry of a new generation and have given space for professionals to flourish and grow -
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any concerns about use of anti biotics in indian shrimps etc. can have adverse consequences
Immediate catalysts
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getting insurance money of about Rs 17-19 Cr. - its a matter of when it comes not whether it will come
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high court approval for merger of pinnae foods - my guess is that share holder approval has come through and ROC, CLB will come through by sept 2016
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improvement in shrimp prices in the USA/taiwan which has apparently happened as this was one of the warmest winters ever and opening stocks post march across US have been significnatly lower than last year
Discl : invested at 65, 90 and 115 levels. forms 7 % of my pf
my take on q1 resuls - the company is focussed on gaining market share and as yet does not have pricing power - the only way to bridge the differential with avanti is to grow faster and hopefully start squeezing back end efficiencies.
a high prorportion of stock in trade indicates that the company is still buying FG from pinnae foods - what will be interesting will be hte margins post the merger. if this growth can sustain and if the company can knock off shared costs post the merger with pinnae, this can do well over a 2-3 year time period. what i would worry about is debtors which we need to see during q2
