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Muted off-take but lower input prices lift margins

Takeaways from Q3FY21: (1) There is reduction in shrimp off-take in key market of USA which impacted Processed shrimp segment. It reported revenue decline of 9.8% YoY, (2) Shrimp feed reported 2.9% revenue growth. We believe Avanti is well poised to gain market shares in shrimp feed from smaller players and (3) With stability in input prices and selective price hikes, the EBITDA margin is likely to stabilize ~12.5% 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) continue to hurt Avanti’s exports. We model Avanti to report PAT CAGR of 13.1% over FY20-23 and maintain ADD rating with target price of Rs560 (15x FY23E; Earlier TP-Rs590).

* Q3FY21 results: Avanti reported revenue decline of 0.8% YoY. Shrimp feed revenues were up 2.9% but Processed shrimp segment reported revenue decline of 9.8%. We believe there is reduction in consumption in USA due to increase in covid cases and repeated lockdowns. EBITDA margin was up 320bps due to lower input prices and cost saving initiatives. Due to 44% increase in other income, the PAT was up 56.7%, YoY.

* Lower demand from HoReCa segment USA may impact Avanti: The company exports c.85% of shrimps to USA. As c.7% of USA citizens are now suffering due to Covid-19, we believe there is likely concern of lower consumption of premium nonveg products 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.

* 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 stable input prices; EBITDA margins are sustainable at 11-12%. We expect the company to report an EBITDA margin of 12.5% in FY21 as well as in FY22 (vs. 11% in FY20).

* 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

* Maintain ADD: We expect Avanti to report revenue and PAT CAGRs of 8% and 13.1% over FY20-FY23 and also expect its RoE to be stable over the same timeframe. We maintain our ADD rating with a DCF-based target price of Rs560 (implied P/E 15x FY23E EPS).

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