Better-than-expected recovery in shrimp exports
Three takeaways from Q1FY21: (1) The demand for shrimp declined due to lower off-take by HoReCa and pantry up-stocking by consumers in Q4FY20, (2) Avanti is expected to gain market share from smaller shrimp exporters as well as shrimp feed manufacturers and (3) With stability in input prices, the EBITDA margin is likely to stabilize in 11-12% range in FY21-22 (FY20: 11%). Slow-down in Avanti’s key market (USA) and lower off-take by HoReCa segment (~50% shrimp consumption in USA) may hurt Avanti’s exports. We model Avanti to report PAT CAGR of 13.2% over FY20-22 and maintain ADD rating with target price of Rs590 (18x FY22, Earlier TP-Rs515).
* Q1FY21 results: Avanti reported revenue decline of 12.6% YoY. Shrimp feed revenues declined 14.3% YoY. Shrimp processing segment reported 4.4% revenue decline. Higher shrimp prices and INR depreciation were chief reasons for strong revenue growth. EBITDA margin was up 100bps due to lower input prices and cost saving initiatives. In-spite of 52% higher other income and 900bps reduction in effective tax rate, net profit declined 5.3% YoY.
* Lower demand from HoReCa segment USA may impact Avanti: The company exports c.85% of shrimps to USA. As c.1.5% of USA citizens are now suffering due to Covid-19, we believe there is likely concern of lower consumption of premium meat product like shrimp. Also, lower buying by HoReCa reduces the demand for shrimp. While this issue may impact all shrimp exporters, we expect an established player like Avanti to gain market share from smaller players. INR depreciation is also likely to improve realization in near term.
* Sales to other countries: Avanti is also in process to reduce the dependence on USA and has started exports to other countries such as China and Europe. While the demand is impacted in USA, recovery in other markets such as China will help to improve volume off-take. Non USA exports are c.14% of total shrimp exports.
* Stability emerging in margins: Avanti’s EBITDA margins moved up from ~12% levels over FY16-FY17 to 20.1% in FY18 and declined back to 11.7% in FY19. However, we believe, considering the stability in input prices; margins are sustainable at 11-12%. We expect the company to report an EBITDA margin of 11.5% in FY21 and 12.1% in FY22 (vs. 11% in FY20).
* Maintain ADD: We expect Avanti to report revenue and PAT CAGRs of 9.7% and 13.2% over FY20-FY22 and also expect its RoE to be stable over the same timeframe. We maintain our ADD rating with a DCF-based target price of Rs590 (implied P/E 18x FY22E EPS).
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