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Capacity expanded…margin gradually improves.

Avanti Feeds Ltd. (AFL) is a leading manufacturer of shrimp feeds with a capacity of 7,75,000 MT and a shrimp processor & exporter with a capacity of 22,000 MT. AFL has a tie-up with Thai Union Group, Thailand.

* We revise our target price to Rs. 420 (Rs. 548) due to current demand slowdown and higher input prices but upgrade to BUY rating factoring gradual improvement in margins and attractive valuation.

* Revenue grew by 3%YoY, mainly due to higher realisation (+6%YoY) in the feed segment while volumes were flat. However, processing segment revenue declined by ~7%YoY due to de-growth volumes (-18%YoY).

* EBITDA grew by 19%YoY as EBITDA margin improved by 100bps to 7.3%. Soyabean meal prices have come down by ~30% from its peak, but wheat & fish meal prices are still on the higher side.

* AFL has added new capacity of 1.75 lakh MT in feed and is adding 7,000MT in processing segment by FY24.

* Q3FY23 witnessed sluggishness in shrimp culture activity due to demand slowdown in export markets. However, shrimp culture is expected to pick up in the subsequent months as farm-gate prices rise.

* Revenue/PAT to grow at 11%/37% CAGR over FY23E-25E. We value AFL at 12x FY25E PE (3Yr avg=15) factoring current slowdown in demand.

Demand slowdown in export markets impacted feed volumes

For Q3FY23, consolidated revenue grew by 3% YoY, supported by higher realisation in the feed segment while volumes were flat. The processing segment reported ~7%YoY decline in revenue due to 18%YoY drop in volumes on account of higher inventory position at the buyers’ end. Shrimp culture activities witnessed a slowdown during the quarter, and the stocking went down by ~27% YoY. The shrimp culture is expected to pick up in the subsequent months to make up the shortfall as the farm-gate prices are improving, which will support feed volumes. AFL has added capacity of 1.75 lakhs MT (production started in Dec 2022) and is also adding new processing capacity of 7,000MT by FY24. We expect a revenue CAGR of ~11% over FY23E-24E.

Margins to recover gradually as some input prices are still high.

EBITDA margin improved by 100bps YoY to 7.3% (6.5% QoQ) due to higher feed prices, along with a decline in input prices & freight costs. Soybean prices have come down by ~30% from its peaks, but wheat & fishmeal prices are still at higher levels. Any further correction in input prices will be positive for margins.

Status of Recall of certain products sold in US

Last year, the company had to recall some of the consignments of cooked shrimp products, that were found to be contaminated with Salmonella by the USFDA and CDC (in June & Aug 21). Avanti has sufficient product liability insurance coverage in the event of any claim. Total provision has been made for Rs.35.62cr related to return & destroyed value of the products, of which Rs. 31.56cr paid towards claims settled. After being satisfied with several preventive measures taken by AFL USFDA had communicated (in May 2022) the termination of the recall of the products.

Valuation & Outlook

Despite the current slowdown in demand in export markets, an improvement in farmgate prices suggests that shrimp culture activities are expected to improve. AFL is prepared for the next stage of growth with new capacity. We value AFL at 12x FY25EP/E (3Yr avg=15x) to arrive at a Target of Rs. 420, upgrade to Buy rating due to correction in valuation.

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