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Margin improves as input prices stabilise

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.

• 2,000 MT. AFL has a tie-up with Thai Union Group, Thailand.

• We revise our target price to Rs. 469 (from Rs. 420) and maintain BUY rating factoring in improvement in margins.

• Revenue declined by 18%YoY, mainly due to volume declines in both feed (-22%YoY) and processing (-19%YoY) segments.

• The shrimp production in the country is expected to come down by ~5- 6% in 2023, and the company has guided for flat to -7% YoY downside in feed volumes and flat growth for the processing segment.

• EBITDA grew by 14%YoY as EBITDA margin improved by 340bps YoY to 12.2% (7.3% QoQ) due to stabilization in raw material prices.

• AFL has added new capacity of 1.75 lakh MT in feed in Dec 2022 and is adding 7,000MT in the processing segment by the end of FY24.

• Revenue/PAT to grow at 5%/29% CAGR over FY23E-25E. Factoring in the current demand slowdown, we value AFL at 13x FY25E PE (3Yr avg=15).

Demand slowdown in export markets impacted feed volumes.

For Q4FY23, consolidated revenue declined by 18%YoY, mainly due to volume declines in both feed (22%YoY) and processing (-19%YoY) segments on account of demand slowdowns. Shrimp culture activities currently witnesses a slowdown, and the stocking is down by ~30% in the first four months of the year. However, the company expects the farmers to go for stocking in a phased manner and expects the shrimp culture to pick up in the subsequent months. However, the company expects the shrimp production to come down by ~5-6% from last year and has guided for flat to -7% volume decline for feed segment and flat growth for processing segment for FY24. 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 end. We downgraded our revenue estimates and expect a revenue CAGR of ~5% over FY23E-25E

Margins improve as input prices stabilise.

EBITDA margin improved by 340bps YoY to 12.2% (7.3% QoQ) on account of stabilization of raw material prices, higher feed realisation and decline in freight costs. Prices of soybean and wheat have come down by ~30%/20%, respectively from their peaks, but fishmeal prices are still highly volatile due to a significant demand-supply gap on account of spurt in export demand from China, Taiwan and Vietnam and shortage of fishmeal in Chile and Peru. Any stabilization will be positive for margins.

Status of Recall of certain products sold in US

In FY22, 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. 32.57cr paid towards claims settled. After being satisfied with several preventive measures taken by the AFL USFDA communicated (in May 2022) the termination of the recall of the products.

Valuation & Outlook

The weakness in shrimp production is likely to continue in FY24. However, the stability in the farm-gate prices suggests that shrimp culture activities are expected to gradually improve. Factoring in the current demand slowdown, we value AFL at 13x FY25E EPS (3Yr avg=15x) to arrive at a target price of Rs. 469, and maintain BUY rating due to improvement in margins.

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