Avanti Feeds Limited (AFL) reported 4QFY17 sales of Rs. 7,044m (+50% yoy and +20% above EE). The growth was mainly led by domestic feed business which grew by +56% yoy while the exports business grew by +14% yoy in 4QFY17. EBITDA margin rose to 18.2% (+807bps yoy) in 4QFY17, mainly driven by better gross margins on the back of weak raw material prices. We maintain our Long rating and update our EPS estimates for FY18E/FY19E by 16%/14% respectively. We have slightly increased our target multiple to 24x( from 22x),as in our view, a company with RoE of 42%, net cash balance sheet and strong earnings growth visibility shall soon see a rerating. Our Sep’18 target price of Rs. 1,560 is based on 24x TTM EPS of 65.0 (previously Mar’18 TP of Rs. 1,070 based on 22x TTM EPS of 48.6).
Rising shrimp exports to US continue to drive the domestic feed sales:
Indian shrimp exports to US registered a healthy growth of 33%/37% in 1QCY17 in terms of volume and value respectively (See Exhibits 1 and 2). In terms of overall market share, India continued to gain market share over other countries (see Exhibit 3). Given the large coastline, suitable tropical climate along with strong IRR’s for shrimp farmers we believe that shrimp production in India will be on strong footing thereby benefitting AFL. We estimate revenue CAGR of 27% during FY17-19E mainly led by its processing business on the back of its increased capacity from 6,000 MTPA to 21,000 MTPA.
Higher shrimp prices and weaker fishmeal prices led to margin expansion:
EBIT margin in the feed business expanded to 19% (+ 870bps yoy) and processing business also improved to 4.7% (+90bps yoy). On the back of weaker fishmeal prices and higher shrimp prices, margins were expected to improve but such a strong performance was a positive surprise. The gross margins expanded to 32% in 4QFY17 and stood at 24% in FY17. Back in FY12 also, the gross margins had risen to 29% on the back of weak fishmeal prices. However, we do note that such high margins are not sustainable and raw material prices remain volatile and difficult to predict. We have assumed a gross margin of 23% (which is the last 7 year average) for our future year estimates.
Improved cash position on the back of excellent working capital management:
As the growth was mainly led by domestic feed business, cash conversion cycle further improved to 26 days in FY17 (vs. 39 days in FY16). The receivable days fell to 4 days in FY17 (vs. 6 days in FY16). The balance sheet remains strong with net cash of Rs. 3,424mn as of Mar’17. Company continues to maintain its healthy dividend payouts with DPS of Rs. 9 in FY17 (+29% yoy).
Volatility in raw material and shrimp prices, any disease outbreak.
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