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Margins to improve going forward.

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 29,000 MT. AFL has a tie-up with Thai Union Group, Thailand. • We maintain our Accumulate rating with a revised target price of Rs. 698, considering expected improvement in margins. • Revenue grew by ~17% YoY, supported by volume growth in both feed (+18% YoY) and processing (+34%YoY) segments. However, EBITDA declined by 3% YoY due to lower realisation. • The input prices have come down materially from the peak, which, along with the uptick in volumes, will improve margins going forward. • AFL has formed a subsidiary to diversify into pet food products (to be completed in two years) and is also making efforts to enter the fish feed and domestic shrimp market. • AFL has recently expanded its processing capacity by 7,000MT. The company also anticipates an improvement in shrimp production in the second season. We expect consolidated revenue/PAT to grow at 8%/26% CAGR over FY24-26E and value AFL at 17x P/E (3Yr avg=15).

Growth in volumes supported revenue.

For Q4FY24, consolidated revenue grew by 17%YoY, aided by volume growth in both feed (18%YoY) and processing segments (+34%YoY). However, realisation declined by 10%YoY in export and 2%YoY in feed segments. The first crop in shrimp culture in 2024 started with an expected growth of ~10-15%, but the culture did not progress as expected due to adverse weather conditions and white spot disease. However, the company expects the loss of volumes could be recouped in the second season,which started in June. AFL has added 7,000MT in the processing segment in Q4FY24 and is making efforts to diversify export markets. We expect a revenue CAGR of ~8% over FY24-26E.

Margins to improve supported by reduction in input prices.

EBITDA declined by 3%YoY, due to lower realisation. The consolidated EBITDA margin dropped to 10.1% from 12.2%YoY. Prices of soybean, wheat and fishmeal have come down by ~37%/14%/14%, respectively, from their peaks, but fishmeal prices were highly volatile due to a significant demand-supply gap on account of a spurt in export demand (from China, Taiwan and Vietnam) and low production in Chile and Peru.Now, the fishmeal supply has resumed from Chile and Peru, which is resulting in material reduction in fishmeal prices (by ~20% recently). Meanwhile, the US has introduced an additional duty (CVD) of 4.36% on export of shrimps w.e.f April 2024 (will be reviewed in October) which can impact processing margins in the near-term, but the reduction in feed input prices along with volume uptick will improve consolidated margins

Foray into pet food & pet care products business

AFL has started a subsidiary (51% stake), Avanti Pet Care Private Limited, in July 2023, to diversify into pet food & pet care products (expect to complete in two years). Currently, the pet care market for cats & dogs is ~ 70,000 metric tons in India and it is growing at a rate of 20% YoY. Most of the brands in the market are imported except Pedigree and Drools and the company expects opportunity in this segment. AFL is also making efforts to enter fish feed segment and domestic shrimp market.

Valuation & Outlook

AFL’s efforts to diversify product segments and markets will benefit in the long term. The GoI also has a strong focus on supporting the industry and targets to double exports to Rs. 1 lakh crore. We value AFL at 17x P/E (3Yr avg=15x) to arrive at a target price of Rs. 698 and maintain Accumulate rating.

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