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Positive demand outlook, cost inflation impacts margin

Avanti Feeds Ltd (AFL) is a leading manufacturer of Shrimp Feeds with a capacity of 6,00,000 MT, and Shrimp Processor & Exporter with a capacity of 22,000 MT. AFL has a tie-up with Thai Union Group, Thailand.

We revised down our Target to Rs.535 (earlier Rs. 620) but upgrade to Buy (from Accumulate) factoring positive demand outlook and attractive valuation

Q3FY22 revenue grew by 17%YoY aided by growth in both Feed (18%YoY) & Processing segments (12%YoY)

EBITDA de-grew by 27% YoY due to decline in EBITDA margin by 380bps YoY to 6.3% (3.5% in Q2FY22) on account of sharp surge in Feed raw material (RM) prices. Gross margin declined to 17% Vs 22.1% YoY.

AFL has taken price hike Feed to reduce the impact of steep input price inflation. RM prices likely to ease when the supply issues normalize

Demand outlook has improved given better shrimp culture conditions, better farm-gate & export prices and re-opening of export markets.

Revenue/PAT to grow at 11%/32% CAGR over FY22E-24E. We lower valuation to 16x (3Yr avg=20) on FY24E EPS to factor margin pressure.

Revenue growth aided by healthy growth in Feed & Processing 

For Q3FY22, revenue grew by 17% YoY on account of 18%YoY growth in Feed segment and 12%YoY growth in Processing segment. Disruption in marine logistics and recall of certain products sold in USA has impacted exports in recent quarters. As restaurants & malls are re-opening, demand is picking up and is supporting shrimp prices. Better farm-gate prices are encouraging farmers and AFL’s increasing market share in Feed segment (48%-50%) will support future volumes. The price hike taken in the recent months will support realisation. AFL has announced capacity expansion of 1.75 Lakhs MT with a capex of 125cr by Q1FY23. Expect revenue CAGR of ~13% over FY22E-24E.

Recall of certain products sold in US

In June & August 2021, USFDA advised Avanti to voluntarily recall certain products processed between 23.10.2020 and 09.11.2020 which were identified as potential for contamination for containing Salmonella. Avanti has taken several measures to eliminate potential recurrence and has sufficient product liability insurance coverage in the event of any claim. First recall was worth Rs.16cr and second for ~Rs.50cr. AFL has made provisions for ~Rs.27.5cr during 9MFY22 towards this and do not expect any stress on it considering the longstanding and reliable customers network in USA.

Surge in RM prices impacts margins, price hike reduces the impact

EBITDA de-grew by 27%YoY, EBITDA/Gross margin declined by 380bps/510bps to 6.3%/17% due to higher RM prices & ocean freight, and lack of export incentive. (New incentive scheme RoDTEP is with lower rates and has not provided during Q3FY22). RM prices in Feed segment have witnessed a sharp increase and AFL has taken price hikes for Feed (Rs.3.8 per kg during Q4FY20, Rs.5.15 in Q1FY22 & Rs.4.25 in August 2021) which has partially reduced the impact. RM prices witnesses high volatility but is expected to ease when the supply issues stabilizes.

Valuation & Outlook

Demand outlook is improving given the re-opening of hotels & malls in export markets along with better export & farm gate prices and favourable shrimp culture conditions. Considering current high volatility in RM prices, we lower our valuation to 16x FY24EP/E (3Yr avg=20) factoring margin pressure to arrive at a Target of Rs.535, but upgrade to Buy considering positive demand outlook and attractive valuation.

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