Multi Baggers

Avanti Feeds Ltd

First of all, a word of caution - the stock of Avanti Feeds is a small cap stock with a market cap of under Rs.100 crores which besides risks of Equity investing also carries risks associated with investing in small caps - including liquidity risk & high impact cost in trading. It is therefore recommended for investors with high risk appetite and is recommended for slow accumulation at the current levels and on declines for long term holding.

Established in 1993, Avanti Feeds Ltd (AFL) is the leading manufacturer of Prawn and Fish Feeds and Shrimp processor and exporter from India. AFL started its commercial operations in 1993 in technical collaboration with Pingtai Enterprise, Taiwan. Later the company expanded the capacity and enhanced technical and marketing capabilities by bringing on board Thai Union Frozen Products PCL (TUF) of the Thai Union Group, Thailand (www.thaiuniongroup.com), one of the world's largest seafood manufacturers. Today TUF is closely associated with AFL with equity participation, technical collaboration and a marketing tie-up in India.

Prawn and Fish Feed Manufacturing Units

Avanti has Three Prawn and a Fish Feed Manufacturing Units, certified ISO 9001:2008, in Kovvur, Vemuluru in West Godavari District, Andhra Pradesh and Pardi in Valsad District, Gujarat, in India with a capacity of 90,000 MT per annum. Avanti produces feed catering to the Indian prawn and fish farmers.

Shrimp Processing and Exports Unit

The Shrimp Processing and Exports Unit, certified ISO 22000: 2005 is located in Gopalapuram near Ravulapalem, East Godavari District Andhra Pradesh, India and confirms to HACCP, USFDA, EU & BRC Global standards. It is also an ACC Certified for best aquaculture practices.

The company has state of art technology coupled with quality consciousness, storage facilities & logistics capabilities, and caters customers in USA, Europe, Japan, Australia & Middle East.

Risks & Investment Rationale:

Key Risks

Lets talk about the risks first. The key risks associated with investing in the stock of Avanti Feeds are :-

a) Shrimp Culture is subject to un-certainties of climatic conditions.
b) Volatility of international prices of sea food and fluctuating foreign exchange rates
c) Raw material prices - especially soyabean.
d) Susceptibility of virus and other diseases for sea food
e) Anti-dumping duty on sea food

Indian Shrimp Industry:

Introduction of Vannamei (White Shrimp) - Game Changer for the Industry

The Indian Shrimp industry was passing through difficult times till 2009 when the Indian government announced that it would allow the cultivation of the pacific White Shrimp "Penaeus Vannamei" from the stocking season, starting Feb 2010. Till then, Indian shrimp farms had been allowed to cultivate only the Indian Tiger Prawn (P. Monodon).

The reason for the decision lies in various advantages the P. Vannamei (White Shrimp) species has over the P. Monodon (Tiger Prawns), namely

a) Better Disease Resistance (than Tiger Prawns)
b) Lower Cost in terms of lower protein requirement in Diet
c) Higher Stocking Density & hence better productivity
d) Better Growth & Survival Rates
e) Other advantages include - Better Salinity & Temperature tolerance, and ease of breeding.

Moreover, since White Shrimp is generally preferred over Tiger Shrimp in the US due to its taste, it makes marketing of the product easier.

A few disadvantages include :

a)Growth rate of White Shrimp slows after reaching a certain size, making production of large-sized shrimp slower. Tiger Prawns on the other hand can grow to larger size, commanding higher price.

b)High competition on international markets for White Shrimp as production is world-wide.

Fallout of the Government Decision

The result of the government's decision was a revival in fortunes of the industry. Prior to the introduction of P. Vannamei shrimp, the Indian shrimp production had been steadily declining, because of frequent virus attacks hitting the Tiger Prawn species.

The introduction of Vannamei to India benefited in augmenting the marine shrimp production from a level of around 88,000 MT worth Rs 1,915 crore in 2008-09 to about 145600 MT worth Rs 3,585 crore in 2010-11 and to about 224500 MT valued at Rs 6,600 crore in 2011-12. The industry thus registered a 3 fold growth in 3 years.

The prospects of Indian shrimp producers were further bolstered in 2011 due to disease hitting Vietnamese shrimp and floods in Thailand.

The growth in shrimp farming led to a turnaround in the fortunes of the Indian shrimp feed industry too.

Avanti Feeds - Partnership with One of the Largest Seafood Producers

AFL has partnered with Thai Union Frozen Products PCL., (www.thaiuniongroup.com), one of the world's largest seafood processors and leading manufacturer of prawn and fish feeds in Thailand with integrated facilities from Hatchery to Shrimp & Fish processing and Exports. TUF  increased its holding in Avanti Feeds from 14.99% to 25.12 %  in July 2012 pursuant to the merger of the joint venture company Avanti Thai Aqua Pvt. Ltd. with Avanti Feeds. TUF thus currently holds 25.12% in Avanti Feed's Rs.9.08 cr Equity, while the Indian promoters hold 41.76%.

Thai Union Frozen Products (Thai Union Group), Thailand - Quick Facts

A few quick facts about TUF are given below :-

Website: www.thaiuniongroup.com
Global Seafood Player, Global Workforce : 32000
Global Network - 4 Continents - Asia, America, Europe & Africa with 10 manufacturing bases
The largest Asian (ex-Japan) seafood processor in sales value.
The world's largest and most integrated canned tuna manufacturer
Brands - Owns world's Leading Brands - Chicken Of The Sea, Mareblu, Petit Navire, John West, Sealect, Century Tuna, Belotta, H. Parmentier, Fisho etc
Strategic Shareholders - Mitsubishi Corporation (Japan), Hagoromo Foods (Japan)
Sales  (2012)- USD 3.44 Billion (Roughly Rs.19,000 cr)
PAT (2012) - USD 15.5 Million (Roughly Rs.850 cr)

Seafood (including shrimp) consumption the world over is rising yearly, due to increasing world population & also because seafood is considered a healthier alternative to meats, and so the shrimp & shrimp feed industry should do well in the future too. By tying up with TUF, which is one of the largest producers of canned & frozen seafood in the world, AFL is assured of the best industry knowhow & practices.

New Business - Dometic Market Foray - Ready to Eat/ Ready to Cook

AFL has ventured into the domestic market with an objective of providing export quality shrimp ready to eat and ready to cook product to Indians by launching "PRAWN KING" brand products. It envisages catering to the prawn consumption in hotels, restaurants and household. It has started an eatery in Hyderabad and plans to open similar outlets in other cities in phased manner.

Conclusion

From Sales revenue of Rs.70 crores and loss of Rs 7 crores in FY 09, Avanti Feeds has registered a Sales Revenue of Rs 640 crores and a PAT of Rs 30 crores in FY 13 - that's a jump of over 9 times in Sales and a significant improvement in profitability. The company has announced a dividend of 65%  for FY13.

In the short term, softening of raw material prices (Soyabean) may be positive for company. The biggest risks for the business however remain a) Banning of White Shrimp (Vannamei) from India for any reason (like anti-oxidant, virus or antibiotic issues) and b) Outbreak of a disease.

The company also faces threat from new entrants which are announcing their entry into the shrimp feed industry and competition may increase in the future. However, by tying up with TUF, we believe Avanti Feeds should be able to maintain it's leadership position in the industry. Besides having vast experience and expertise in P. Vannamei Hatchery, Feed and Culture, TUF also has a large wholesale and retail network in USA, and will also support AFL in expanding it's processing and export market .
The company expects a demand growth of 20-25% for the next few years and has over the last two years doubled its Shrimp Feed manufacturing capacity and has tripled the Shrimp Processing capacity.

The company has, each year, in the last 2 years distributed 25% of the profits earned (PAT) as dividend (plus dividend distribution tax). If the company continues with this payout & maintains this track, we believe this will lead to a change in perception and gradual rerating of the stock. We believe that with an EPS of Rs.33, PE of less than 3.5, CAGR  of over 70 % (over last 3 years), and a dividend yield of 6%, the stock merits investment at the current valuations.

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