Finding Success With Shrimps

Avanti Feeds is in the business of quality prawn and fish feed as well as prawn exports. This company has been in the limelight due to its trail-blazing performance as evident not only from the financial results it declared for the first half  of FY15 but also in terms of the stock market gains it has been offering year-on-year since April 2011. The graph below charts the journey of CNX NIFTY and Avanti’s share price since the start of 2011. Every Rs 1 lakh invested in the shares of the company at the start of 2011 would have become eye-popping Rs 51.30 lakh as of now i.e. November 20, 2014. The share price of the company has more than doubled in since the start of August. So what is driving the share price of Avanti? Is it still worth buying?

Industry Overview

Avanti Feeds is in the business of aquaculture of seafood and manufacturing of feed. The seafood industry in India is quite a story which has an exploitable seafood resource of 4.5 MTPA (million tonnes per annum) on its vast coastline, 70 per cent of which is already being exploited. India’s seafood production from both capture and aquaculture is 8.9 MTPA, 10 per cent of which is exported, generating foreign exchange earnings of about Rs 19,000 crore. Government statistics reveal that India has 12 lakh hectares of potential aquaculture land but only 2 lakh hectares are under cultivation now, just 1/6th of the potential.

Shrimps account for 25 per cent of volume and 55 per cent of value of the total seafood exports from India. There is tremendous growth in the resources and infrastructure as well as capabilities and competence of the Indian seafood industry. We have healthy installed capacities spread among the 450, state-of-art, shrimp processing plants, 60 per cent of which are EU-approved. With the demand for shrimp coming from the US and EU nations, Indian exporters are now directly exporting to these nations rather than to China. With the prices of shrimp firming up on international markets and with the recent US FDA’s ban on Thai seafood, Indian farmers and exporters made a moolah in the year 2013-14. Encouraged by this new-found optimism the Government of India has set a seafood export target of USD 10 billion by 2020 from the current USD 3 billion.

The Avanti Feeds’ Story

Avanti Feeds Limited raised Rs 584 lakhs in a public issue in FY08-09, issuing 146 lakh shares of Rs 10 each at a premium of Rs 30 per share. The company used these funds for setting up another shrimp feed plant at Kovvur, WG district of Andhra Pradesh. Besides the two shrimp feed plants the company also has a state-of-the-art shrimp processing plant at the EG district of Andhra Pradesh with installed capacity of about 1,800 MTPA. Ever since its debut into the Indian capital markets, the company has constantly expanded its capacities from internal funds. In 2012, the company expanded its fish feed processing capacity to 8,000 MTPA from 2,720 MTPA. 

That same year the company acquired another shrimp feed plant from Thai Union Frozen in Gujarat to cater to the demands of shrimp farmers of the west coast. This was acquired through a share swap as a result of which the shareholding of TUF in the company has increased to 26 per cent of the issued and paid up equity shares. Thus, the total shrimp feed manufacturing capacities of the company exceed 1 lakh MTPA. From April 2014, Avanti Feeds will benefit from commissioning additional 50,000 MTPA plant for shrimp processing, which will boost its export sales substantially.

Avanti Feeds has a pedigree partner in Thai Union who provides the technical knowhow from shrimp stock breeding to upwards along the value chain. Thai Union Frozen Products PCL (TUF) is the world’s largest seafood company (as per TUFs annual report 2012-13), and clocked a turnover of USD 4 billion in 2014, which is greater than the consolidated Indian seafood exports.

Financial Performance Up To 2013-14

Avanti Feeds’ earnings per share (EPS) is exceptionally good and rising too. The company declared a dividend of 150 per cent for FY 2013-14 as against 65 per cent the previous year. Its promoters’ holding in equity is 42 per cent, down from a peak of 48 per cent in 2012 because of the acquisition of Avanti Thai Aqua Feeds.

Future Performance

Avanti Feeds Limited is a bellwether stock of the Indian seafood industry with very little competition from listed domestic players like Waterbase, Royal Marine, IFB Foods, etc. The company has commissioned a new 50,000 TPA shrimp processing plant which will show its full effect in FY14-15. Assuming the plant operates on a 20 per cent capacity and all the additional processed shrimp is sold at the current buoyant international rates of USD 4.5 per pound, an additional sale of Rs 600 crore is possible, increasing the PBT by 35 per cent and giving an EPS of Rs 135.

Avanti Feeds’ financial performance in the last eight quarters has been showing continuous improvement in sales and profit. The results of the years 2011 to 2014 have shown extraordinary growth in sales and net profit. In 2011 the company’s net profit was Rs 3 crore which has multiplied 10 times in 2012 and after a pause of a year jumped to more than 100 per cent in 2014.  Thus from R. 3 crore net profit in 2011 it has grown to Rs 70 crore in 2014. The first and second quarters of June 30 and September 30 have registered an impressive performance. For the quarter ended June 2014 its net profit is shown at Rs 25.62 crore against Rs 14.23 crore as on June 30, 2013 i.e. growth of more than 80 per cent. For the quarter ending September 2014 the net profit declared by the company comes to Rs 34.18 crore as against Rs 18.58 crore for the 2013 September quarter, thus once again showing a growth of more than 80 per cent.

The net profit for the first half of FY15 comes to around Rs 59.80 crore against full year net profit as on March 31, 2014 of Rs 70 crore. Normally the third quarter is considered better for sales and profit for the industry and hence we believe that for the period ending March 2015 the company will post profit of anywhere between Rs 120 to 130 crore i.e. nearly 100 per cent growth. If this happens it will be the second year of nearly 100 per cent growth of the company in a row.  The company’s equity is Rs 9 crore against which free reserves recorded are of Rs 225 crore as on September 30, 2014, which would be 25 times than the equity of Rs 9 crore of the company. Thus there is good chance for a minimum 1:1 bonus next year.

Price Fluctuations and Scrip Volumes

It is observed that over the last eight quarters, during the quarterly results the company’s scrip has faced volatility in prices and volumes. Of course the price of the scrip has continued moving upwards since the past 12 quarters. However there is always a lot of fluctuation 10 days before and 15 days after the quarterly results’ announcement with good volumes at time. Out of its total equity of Rs 9 crore of face value of Rs 10 each its public share holding is 55.70 per cent. A total of 50,59,117 shares are with the public and the balance 44.30 per cent are with the promoters. This lesser liquidity in the scrip is likely to be sorted out in the future by splitting the face value of the shares. The process itself offers several advantages to investors and attracts more people to purchase the shares.

On the valuation front the shares of the company are still trading at a trailing 12-month PE of 16.86 times. If we discount the FY15 earnings, it is available at an attractive valuation of 13x. Looking at the spectacular growth in the earnings of the company we believe that the results of FY15 will drive the share price of the scrip to reach more than 50 per cent its current level of Rs 1,800. However, keep a lookout for the negatives that may impact this scrip such as strengthening of the rupee, disease outbreak alerts, farm holiday notice from regulatory bodies, strong international and domestic revival of supplies, changes in demand, or probable US/EU alerts against Indian seafood. If all goes well, the market price of this share could be around Rs 3,000 in a year’s time from its current level as in November 2014 of Rs 1,800 per share. Indeed, there is 66 per cent room for a big upside!

The Indian seafood product exports during 2013-14 recorded a major jump of 59 per cent in value terms as compared to 2012-13. The exports were to the tune of Rs 29,500 crore as against Rs 18,856 crore in 2012-13. Shrimp exports accounted for 65 per cent of the total seafood exports in value terms, an increase of 100 per cent as compared to the previous year. In the year 2012-13 shrimp exports were of Rs 9,608 crore. In the current year the shrimp exports are of Rs 19,175 crore. In volume terms shrimp exports grew by 33 per cent from 2.26 lakh MT in 2012-13 to 3.02 MT in 2013-14. The major export markets have been USA, Europe, Japan and Southeast Asia during 2013-14. It is heartening to note that for the fourth consecutive year the shrimp culture industry registered growth during 2013-14.