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Correction in commodity cost stabilizes margins

Led by strong growth in the processed shrimp segment (up 55% YoY), Avanti feeds reported revenue growth of 11.4% YoY during the quarter. Key takeaways: (1) EBITDA margin was largely stable YoY, despite improvement in gross margin (79bps YoY); we believe correction in soy meal and fish meal prices were chief reasons and (2) all segments reported growth YoY, ex-shrimp hatchery with improving demand with re-opening up of economy. We believe revival in HoReCA segment is USA has resulted in strong off-take of processed shrimps. Avanti’s capacity expansion plans will likely result in strong volume growth for shrimp feed. We model Avanti to report a PAT CAGR of 29.5% over FY22-FY24E and maintain ADD on the stock, with a revised DCF based target price of Rs510 (implied 17x FY24E EPS; Rs500 earlier).

* Q1FY23 performance: Avanti reported revenue growth of 11.4% YoY. While EBITDA grew 9.7% YoY, adj. PAT was down 4.6% during the quarter. (3-year revenue and EBITDA CAGR: 12.8% and -8.7%, respectively). We believe decline in Soybean meal and fishmeal prices resulted in gross margin expansion of 79bps YoY. However, higher staff costs and other expenses as % of sales resulted in flat EBITDA margin YoY. PAT margin was down 104bps YoY, due to higher effective income tax rate.

Segmental performance: Shrimp feed and processed shrimp segments reported revenue growth of 5.4% and 55% YoY respectively, in Q1FY23. We believe, strong revival in HoReCa in USA is leading to strong revenue growth in processed shrimp segment. Operating margins for the segment expanded 378bps YoY. We note Shrimp Hatchery revenue declined 9.2% YoY. We model all the segments to report steady recovery with re-opening up of economy.

Capacity expansion to drive volume growth: Avanti has invested in a new facility for capacity expansion for shrimp feed in Bandapuram, Andhra Pradesh. This plant will expand capacity by 175,000mtpa. We believe the commencement of the new plant will likely result in growth of shrimp feed for the company

* Maintain ADD: We model Avanti to report revenue and PAT CAGRs of 15.4% and 29.5% respectively over FY22-FY24E. We also expect its RoE to be at 19% in FY24E. Maintain ADD with a revised DCF-based target price of Rs510 (implied P/E 17x FY24E EPS) from Rs500 earlier. Key risks: higher than expected input inflation, and lower than expected offtake of products.

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